{"id":527,"date":"2023-02-06T15:20:44","date_gmt":"2023-02-06T15:20:44","guid":{"rendered":"https:\/\/www.wealthfor.us\/article\/?p=527"},"modified":"2023-07-11T01:25:29","modified_gmt":"2023-07-10T17:25:29","slug":"fed-pivot-coming","status":"publish","type":"post","link":"https:\/\/www.wealthfor.us\/article\/fed-pivot-coming\/","title":{"rendered":"Is the Fed Pivot Coming? What should we do?"},"content":{"rendered":"

Fed Pivot means a change in the Fed monetary policy, from tightening to easing, or vice versa. FYI, the Fed is the US Central Bank.<\/span><\/p>\n

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Which Fed pivot are we referring to here?<\/span><\/h2>\n

In early 2021, the inflation rate was still at ~2%. However, by the end of 2021, the inflation rate has jumped to >7%. The Fed has been in a loose monetary policy since the COVID-19 pandemic by injecting liquidity into the market. This excess liquidity causes inflation to rise. With such high inflation, the Fed had to pivot into a tightening cycle by hiking the interest rate at a fast pace. Toward the end of 2022, we started to see the inflation rate moderating and the market expecting the bulk of the interest rate hikes to be behind us. <\/span>We are already at the end of the rate hike cycle. As inflation returns to normal, <\/span>the Fed will soon pivot back into its loose monetary policy<\/b><\/em>.<\/span><\/p>\n

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From the last FOMC meeting<\/span><\/h2>\n

The Fed meets almost every month to discuss the state of the economy and its economic policy. In the Jan 2023 FOMC meeting, the Fed raised the benchmark interest rate by 0.25% to the target rate of 4.5-4.75%.<\/span><\/p>\n

The market already expected this rate hike. The surprise came during Fed Chairman Jerome Powell\u2019s speech after the meeting. Powell has always been very hawkish in his previous speeches since the Fed started hiking rates. This time, his stance is still the same as before, which is for the Fed to stay on its course until they are sure with high confidence that inflation has been under control and reaching its target inflation rate of 2%. However, at the same time, he also acknowledged that inflation has been moderating, and the Fed\u2019s focus is now on slower rate hikes<\/em> while waiting for more data to come in. The Fed is now at the tail end of its rate hike cycle<\/em>. The Fed’s hint about winning the inflation battle was unheard of before, and the market was euphoric. The market believes this is the Fed pre-pivot, and the actual pivot is coming soon. Because the market is forward-looking, the market rallied to price in this pivot.<\/span><\/p>\n

Before you jump in and buy all those risk-on assets, such as stocks and REITs, it would be better to understand first what possible scenarios that may happen so that we can manage our risk appropriately.<\/span><\/p>\n

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The Fed Dual Mandate<\/span><\/h2>\n

The Fed has a dual mandate: maximum employment <\/span>and<\/b><\/em> price stability.<\/span><\/p>\n

Maximum employment<\/span><\/h3>\n

How is the Fed doing in this metric? We have heard of the various layoffs impacting many tech firms in the past few months. Many economists are expecting a recession which may cause unemployment to rise. However, the <\/span>latest job data<\/span><\/a> shows a different picture. The US economy added 517,000 jobs in January, with the unemployment rate at 3.4%, the lowest in several decades. Wage growth is also stable. The job market is vibrant overall, and there is no indication of a looming recession. At least, not yet. The Fed is doing very well on this mandate.<\/span><\/p>\n

Price stability<\/span><\/h3>\n

Rising inflation causes prices to go up. Though has moderated, inflation is still at an elevated level. High inflation not being dealt with may cause the hyperinflationary loop to happen. Wages rise so people can afford higher prices. But then higher wages allow higher prices to become affordable, and the cycle continues. This loop is called the wage-price spiral. And this spiral causes hyperinflation. The Fed has been working on this mandate by raising the interest rate fast to curb spending and borrowing, thus lowering inflationary pressures. However, more work still needs to be done because inflation is still high above their target rate of 2%.<\/span><\/p>\n

Based on this dual mandate, the Fed can afford to wait until inflation is firmly under control before pivoting. <\/span>Powell has more room to keep interest rates high because the job market is still strong<\/b><\/em>.<\/span><\/p>\n

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Scenarios of when the Fed pivot will come<\/span><\/h2>\n

We know the Fed will eventually pivot. There is no reason to keep interest rates this high if inflation is already under control. The question is: when will this Fed pivot happen? Let us consider some possible economic scenarios and their respective Fed’s pivot.<\/span><\/p>\n

Scenario #1: Soft landing<\/h3>\n
\"Soft
There is no recession, and the Fed will slowly lower the interest rate.<\/figcaption><\/figure>\n