Interest Rate Hikes
For the last few years, the market has been 100% focused on what the Federal Reserve was going to do. During Covid, it was very stimulative, but in 2022 that flipped to being very restrictive, where the Federal Reserve was trying to get the market and prices to drop. Going into 2023, the story is the same. What we’re watching for this year is when will the Fed feel comfortable with pivoting from restrictive hiking to maybe pausing or turning around. This week’s meeting is very important and will be the first meeting of 2023. They’ll announce on Wednesday what their rate policy is and expectations are that they will go from 4.5% where the Fed Funds Rate is up just 25 basis points to 4.75%. That’s a big move considering we had 75 basis point hikes many times through last year. The Fed will not stop hiking its Fed funds rate until it is above CPI. History is a good guide to this and that’s where the Fed thinks they have finally beaten inflation. The Fed funds rate is currently at 4.5% and is likely going to 4.75%. Inflation most recently was at 6.5% so there’s still a lot of work to do. The Fed’s guidance on how they view potential inflation between now and when they meet next in March is going to be huge. Hopefully, by then, inflation has come down to a point where the Fed can at least pause. In a chart shown in this episode, you can see why the market thinks that a pause is good. The chart shows that historically the Fed doesn’t sit idle for very long. As soon as they get to that peak level, they usually make some sort of policy mistake where they chase inflation up. Similarly, they didn’t chase the market and the economy down on the other side because they typically hike rates, so they must immediately start cutting rates. Cutting rates is very stimulating for the stock market and we may start seeing what could be a sustainable rally which we haven’t had in many months. That’s why this decision is so important. It’s not really what they do, we all pretty much know what they’re going to do, it’s what they say. There’s so much teetering on when they can pause and then likely reverse course, which will help the market.
Positivity
Last week, the Core PCE report came out and was up 0.3% month-over-month and 4.4% year-over-year. The Core Personal Consumer Expenditures report focuses on businesses and is a key part of the Consumer Price Index report. With that being said, over the past three months, Core PCE is only up 2.9%, with the Fed funds rate possibly going up to 4.75%. We’re looking at the first time in a long time when we might have some real positive rates. It was just a short time ago when we were talking about negative nominal rates, not even including inflation. Now we’re looking at positive real rates, which would be the Fed funds rate minus inflation. It’s very interesting and gives consumers a lot of different options as opposed to the negative interest rate environment that we have been in for quite some time.
Misleading Headlines
As we head into another big week of corporate earnings reports, one of the big stories so far this earning season is the layoffs being announced by some of the big technology firms. Some might think that the Federal Reserve will be happy with the layoff announcements but looking deeper into the situation, the headlines might be misleading. Looking at a chart shown in this episode of recent layoffs announced by technology firms gives a better picture of what’s really going on. On the chart, the blue lines represent the percent growth in the workforce during the pandemic and the orange lines on the left of the chart represent recent layoffs. Amazon increased employees by 93% and Spotify increased by 122%. Some of these companies had record hiring sprees, so the recent layoff announcements seen in the orange lines are not too surprising. META increased its workforce by 94% and just announced layoffs of over 12% of the workforce. It’s not that big of a deal considering the size of hirings in recent years. Also, we’re hearing that those in technology losing their jobs are being rehired quickly, even with some being hired within a few days. If we hear of more layoffs this week from technology companies, it might not be as negative for the stocks and future guidance as some think. As always, it’s important to look at the full picture.
Bobby Norman, CFP®, AIF®, CEPA®
Managing Director
Wealth Consultant
Email Bobby Norman here
Trey Booth, CFA®, AIF®
Chief Investment Officer
Wealth Consultant
Email Trey Booth here
Ty Miller
Associate Vice President
Email Ty Miller here
Fi Plan Partners is an independent investment firm in Birmingham, AL, with a team of professionals serving clients across the nation through financial planning, wealth management and business consulting. The team at Fi Plan Partners creates strategies in the best interest of their clients using fee based investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Economic forecasts set forth in this presentation may not develop as predicted.
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