The Great Reset is on, brought to us by the onset of economic laws working together with reality. It looks like we are entering into a new era that marks the end of free money & the “Fed put”. A zero-interest rate essentially renders free money, but worse yet are negative interest rates (the equivalent of paying someone to borrow money) which we have seen in Europe. The “Fed put” refers to the unwritten law that our central bank will always intervene to prop up the stock market to protect investors from losing money. Investors have good reason to discount this law currently, and as we can see from this chart, the Fed Funds rate is finally being pushed off its covid floor to 3.08% currently – no matter the consequences.
Investors have been foolishly clinging to the idea that the Fed would “pivot” to rate cuts. If they would simply listen to what the Fed has been saying all along, there would have been no bullish run-up to pop before the most recent rate hike on November 2.
Notably, the Fed has a nifty model it uses to determine what the proper Fed Fund rate should be based upon some economic variables (refer to model below). In plain sight of everyone, the Fed is currently targeting a Fed Funds rate of between 6.59% to 7.49% by 4Q22 (more than double the current 3.09% rate)!
What does this mean? More pain for the stock market along with every over-leveraged consumer, company, and government entity. Given the speed and magnitude of these rate hikes, this is a risky play for the Fed. Just like the powers that be took far too much economic risk to institute the covid lockdowns, the Fed should be careful to avoid excessive risk in their efforts to unwind what is already done.