Breaking: Official FED & Market Prediction

November 1, 2022
I predict that the FED will do exactly what markets are expecting of them tomorrow (raise by .75 and soften the tone on future hikes) for three primary reasons: 

1. FED probably* doesn’t want to disrupt the markets a week before the election.

Markets fully expect that the FED is going to “pivot” from an outright hawkish tone (“we’re raising rates a lot more to fight inflation!”) to something a little softer (“we’ll probably have to raise a little more, let’s see how the data comes in”).

This anticipation of a pivot has been a primary driving force of the markets over the last few weeks, leading to a strong bounce of nearly 10% in the S&P 500 since October 13th lows.

This means markets would be severely disappointed if the FED does not make the pivot to softer language, which could lead to a massive selloff on Wall Street… just as voters start to head to the polls.

I think the FED is fully aware of this and doesn’t want to be responsible for doing anything right now that could change the way people vote next week.

Of course, I could be wrong. As Kevin Hincks of the TD Ameritrade Network pointed out on Twitter… there may be an incentive for Powell to “stick it to” the Biden Administration!
2. Consumers are already feeling the pinch. 

LikeFolio consumer data is already showing that consumers are facing significant economic challenges:

Credit cards are getting maxed out, people are falling behind on payments, and everyone is worried about the price of food and gas.

If the FED is looking to “cool off” the economy, they need to look no further than the collective consciousness of the American consumer.

What we see in this macro trend data will almost certainly be borne out in the backwards looking datasets the FED relies on in the months ahead.

3. They’ve already overshot.

When I look at the LikeFolio data, I see a quantified display of what I am hearing from real people each and every day: “I can’t keep this up”

Just like the FED fell behind when it came to fighting inflation (were they asleep??!!)… I believe the FED is in serious danger of overshooting on interest rate policy, which could do serious long-term damage to the U.S. Economy.

A moment of pause here would be a welcome reprieve from the reactionary flailing of the institutional expert class that has already done too much damage.

Probable Stock Market Reactions:

It always makes me nervous when the market has made a major move in anticipation of an event like a FED announcement.

Here are the three possible scenarios I see, along with their likelihood of occurring and probable market impact:

  • Scenario 1 (20% chance): FED raises .75, pivots, suggests inflation likely cooling, telegraphs limited future rate hikes. Markets could rally 3-5% in a matter of days on this news.
  • Scenario 2 (60% chance): FED raises .75, pivots to a softer stance, but leaves the door open for continued aggressive hikes based on future data. This is what the market has already “priced in” at this point, IMO. I think it would probably be a “sell the news” situation, leading to a 1-3% pullback in the overall markets.
  • Scenario 3 (20% chance): FED raises .75, continues hawkish language. This is the disaster scenario for the stock market, which would put all of the nearly 10% gain of the past few weeks at risk very quickly.

Bottom line: I think there is an 80% chance the market will have a negative reaction to the FED’s announcement, but the most likely scenario is a mild pullback.

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