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Will the FED continue to raise rates?

Updated: Sep 20, 2023

We check in on the FED and take a peak at how this could impact you.

Federal Reserve Chairman Jerome Powell
Federal Reserve Chairman Jerome Powell

Inflation has been a silent killer for people's pocket books after Americans got their stimulus checks. The ramifications are the Federal Reserve has been raising rates at an unprecedented pace the last two years (the fastest in history actually) to combat this rise in inflation. What do we see happening to rates moving forward?

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As you may have noticed from our Saturday Morning Cartoon CPI was reported last Thursday and the FED has done a tremendous job at reducing inflation their target of 2%, but we haven't quite hit that. So where do we go next?

Twitter CPI Banks Expectations vs Actual Results
CPI Banks Expectations vs Actual Results

Well let's first let's take a look at the tools the Fed has to "combat" inflation, here are 7 strategies they use to do that:

  1. Interest Rate Policy: One of the main tools the Federal Reserve uses to manage inflation is the manipulation of short-term interest rates. By raising interest rates, the Federal Reserve aims to reduce borrowing and spending, which can help cool down the economy and lower inflationary pressures.

  2. Open Market Operations: The Federal Reserve can buy or sell government securities in the open market to influence the money supply. By purchasing securities, the Fed injects money into the economy, potentially increasing spending and demand. Conversely, by selling securities, the Fed can reduce the money supply and curb inflation.

  3. Reserve Requirements: The Federal Reserve can adjust the reserve requirements that banks must hold against their deposits. By increasing reserve requirements, the Fed reduces the amount of money that banks can lend, which can help reduce overall spending and inflation.

  4. Forward Guidance: The Federal Reserve can use communication and forward guidance to signal its intentions regarding future monetary policy actions. Clear communication about its commitment to controlling inflation can influence expectations and behavior in the financial markets and the broader economy.

  5. Quantitative Easing (QE): In periods of severe economic stress or deflationary pressures, the Federal Reserve may engage in QE, where it purchases large quantities of government securities and other assets to further increase the money supply and lower long-term interest rates.

  6. Macroprudential Policies: The Federal Reserve can also use macroprudential policies to address specific vulnerabilities in the financial system that may contribute to inflationary pressures. These policies are designed to enhance the stability of the financial system and prevent excessive risk-taking.

  7. Inflation Targeting: The Federal Reserve has a dual mandate of promoting maximum employment and stable prices. Inflation targeting involves setting an explicit target for inflation and adjusting monetary policy to achieve that target over a specific time horizon.

It's important to note that the effectiveness of these tools can vary based on the economic context and the specific causes of inflation. The Federal Reserve continuously assesses economic conditions and adjusts its policies accordingly to achieve its policy objectives. For the purposes of this blog post we are going to look mainly at interest rate increases.

The market has been expecting that due to the Federal Reserve policies that they would stop raising rates earlier this year. Unfortunately it seems that inflation is finicky and keeps peaking its ugly head. In fact we noticed one tweet this week from @Super_Macro that showed the largest gain in 3 months to U.S. Super Core Inflation showing inflation is still being persistent where it had declined in May and June 2023.

The Pace of US Super Core Inflation YOY
The Pace of US Super Core Inflation YOY

In short, while the FED has been implementing policies to achieve its objectives inflation remains persistent. Therefore our hypothesis would be that the FED will continue to raise rates as this their policy tool to combat inflation.

How can we verify this?

Two ways: Charts + the CME FedWatch Tool

The September chart from CME is suggesting the Fed is going to raise another 25 basis points in September and potentially in November, although it seems less likely with only a 68% chance.

Target Rate Probabilities for September 20, 2023 Fed Meeting
Target Rate Probabilities for September 20, 2023 Fed Meeting

Target Rate Probabilities for November 1, 2023 Fed Meeting
Target Rate Probabilities for November 1, 2023 Fed Meeting

The expectation that the Fed will pause rates in September being pretty much a certainty allows us to move forward in the markets with confidence. WE'll keep following price. We've already been long $TBT from a market perspective and this only reinforces it. So now the question is does that 68% probability in November equate to another hike?

We'll take the win today as we stayed disciplined and hold a quarter. We highly suggest following us on Twitter as it's easier to see trades we are making real time to benefit you in the market!

We appreciate everyone that takes the time to read our blog posts and don't forget to trade confidently!


Essex Trading Quote of the Day (#EsxQotD)

"IF you don't bet you can't win. IF you lose all your chips, you can't bet."

~ Larry Hite



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