Federal Reserve Meeting Report: Higher For Longer

The Fed ended its June meeting yesterday. My take on the usually opaque meeting report is that it was as benign as you could expect for a late stage election year. My call is that the Fed will hold interest rates steady till at least after the election if not through the remainder of 2024. The Fed is not going play politics in the most toxic election we’ve ever seen. You may question the Fed’s abilities, but they aren’t idiots. So, once again, I’ll tell you that my take on the Fed is simply this: no change in interest rates; they will remain higher for longer. Deal with it.

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When the time comes that the Fed cuts interest rates, it won’t be a good thing. It will be because we will be facing hard times. I believe that you should be increasingly concerned about the late stage bull market, the economy, the geopolitical situation and the toxic election year. But when the Fed finally does cut interest rates, you should get ready for some challenging times. You should get ready for some really volatile markets that could destroy the wealth you built during the unprecedented times of zero interest rates and free money. So ignore the media and the Wall Street narrative of low interest rates.

The Fed’s decision making on interest rates is no longer strictly about the US economy. Yes, there’s the Fed’s Dual Mandate of Maximum Employment and Price Stability. That Dual Mandate is an anachronism. This is the age of the weaponized dollar. The age of the new cold war. The age of global debt that can never be repaid. The age of financial smoke and mirrors where almost every government entity is technically bankrupt. The age of Central Bank Digital Currencies.

There’s far more to the Fed’s decision making than “Dot Plots” and “Core” numbers. Far more than meets the eye. The Fed is like a Las Vegas magician. Hoping to distract you with one hand while performing miracles with the other. Money is money. Debt is debt. 1 and 1 will always equal 2. Markets will always come back to fundamentals. Don’t kid yourself. Listen to Ray Dalio. Listen to Warren Buffet. Listen to any of the greats. They all say the same thing: “Life is rough and you gotta be tough.” Successful investing is all about discipline, risk management and luck. Disregard luck and you’re a fool.

We came in to 2024 with markets expecting the Fed to make 6 or 7 interest rate cuts before year end. I’ve always believed that this mantra was absurd. The Fed is being battered by too many forces. Many of them are conflicting or mutually exclusive. Some of them within their control, many of them outside of their control. Look at the insanity around us. The Fed is subject to this same insanity. But they have to perform on a public stage. Like the Wizard of Oz, the Fed has to create results that will keep the party going. There is no alternative. TINA. So not only do you have the Fed performing like the Great Oz behind his curtain, but the last thing the Fed wants for you to see behind the curtain and realize that they are not magicians. They’re like a Rodeo Bull Rider. Hanging on for dear life while getting tossed all over. They have to communicate something that is plausible. The point to remember is that misguided or not, whatever they say will move the markets. Like it or not when the Fed speaks, markets will react.

Now think about how the Fed’s decisions are transmitted to the public. They are broadcast through the media. And you have to understand that the media loves reporting on Wall Street. Wall Street is always the easy slam dunk story. Wall Street is American Capitalism. Wall Street is Big Money. Wall Street is Big Dreams. Wall Street is flamboyant characters, hot cars, private jets, super yachts. The media loves Wall Street and Wall Street loves low interest rates. Always and forever. Wall Street will always want lower interest rates. No matter what. Low interest rates is like oxygen to Wall Street. Wall Street prints money in a low interest rate environment. Prints money hand over fist. Because of the Flash and Dash, the media loves Wall Street and Wall Street loves low interest rates. So you’re always going to hear Wall Street talk up lower interest rates.

The Fed has to play to this audience shouting for lower interest rates. It’s one of their most important audiences. So the Fed is going to continue to dangle lower interest rates. No matter what happens Wall Street is either going to be screaming for lower interest rates. Or screaming to keep interest rates low. No matter what the economy or the markets do, Wall Street will always be screaming for lower interest rates. It’s so pervasive that it’s boring. But the press eats it up and it puts enormous pressure on the Fed.

At this point there’s little reason for the Fed to cut interest rates. The economy is apparently doing well. Of course there are weak spots. We have a big complex economy that’s intertwined with the global economy. Of course we’re seeing weakness in real estate. Home prices are reportedly up 60% is just the past few years. Are you naïve enough to believe that this can go on forever. Commercial real estate is under pressure because the pandemic redefined work and high rise office towers are empty. In addition, many of these projects were built with the cheap financing of the zero interest rate era. They have to be refinanced at much higher rates. This will reduce profitability and will lower property values. Many of these properties are going to get clobbered. This looming disaster may be the end of some land developers and some local banks, but it’s not the end of the world.

Likewise the automotive sector. Detroit has been aggressively raised prices recently. Take a look at how much it costs to buy an Ford F150. Ridiculous. Trees don’t grow to the sky. Corporations can’t raise prices forever. When they try, they fail. Whether it’s real estate, transportation or the stock market and other financial assets. Prices will usually revert to the mean. And in doing so, they will usually overshoot to the downside.

With regards to the stock market, this reversion to the mean is where you want to be ready to buy. That time is not here yet. But it will come. And it won’t be because the Fed has caused it. It will happen because it is time. The Fed doesn't make the markets. The Fed reacts to the markets. The Fed has ended their meeting with their usually opaque statement.

I continue to advise my clients that the Fed will keep interest rates higher for longer. And further interest rate hike are not out of the question. So live your life. Get on with it. Don’t try to time the Fed. It’s a fool’s game.

The information contained in this Higgins Capital communication is provided for information purposes and is not a solicitation or offer to buy or sell any securities or related financial instruments in any jurisdiction. Past performance does not guarantee future results.