This week on The Money Puzzle Podcast Eric Douglas & Aaron McAndrew discuss their thoughts following the meeting that The Federal Reserve had this previous Friday down in Jackson Hole, Wyoming. The Federal Reserve chairman came out and made some comments that were quite interesting, to say the least, and the market definitely had a reaction.

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Speaker 1 [00:00:02] Hello and thanks for joining us here for another episode of The Money Puzzle. I am Eric Douglas, a family wealth planning partners, joined by my partner here, Erin McAndrew. There you go. Didn’t want to steal your thunder. So today we’re going to we’re going to come up with a little bit more of a timely episode, so to speak. So. The Federal Reserve had their meeting last week. So today is what, August 28th? I believe it’s Monday following the 29th I’m sorry, August 29th, following the meeting that the Fed had this previous Friday down in Jackson Hole, Wyoming, which is an annual meeting or an annual conference that they do at the meeting, the Federal Reserve chairman came out and made some comments that were quite interesting, to say the least, and the market definitely had a reaction. So I’ll let you maybe take it away from here. And you know, what did he say and what was the reaction that we saw in the markets on Friday?

Speaker 2 [00:00:54] Well, basically, you know, without going into a lot of specifics on it, the he was a lot more hawkish in terms of what I think what the market was alluding to believe recently. We’ve seen some inflation reports that have come out that have been lower than the expected inflation. And I think some of the investors in the market have were anticipating that rate hikes were going to slow a little bit or at least not be as aggressive as they have been this year. And based on his comments, he’s we’re full speed ahead. We’re going to do whatever it takes to beat inflation and to get inflation down to our target, 2%. And, you know, people are interpreting that, investors and markets interpreting that. As you know, we may continue on with the three quarter basis point rate hikes, for sure, a 50 basis point rate hike again in September and potentially another one in October, which caused the market to fall back significantly last Friday.

Speaker 1 [00:01:57] And to be clear, when you say hawkish, hawkish, you can either be hawkish or dovish. So we’re using birds as the analogy here that is used in popular culture anyway are mainstream financial media. But hawkish means you’re being far more aggressive with rate policy, right? With rate increases basically for being dovish, you’re being a lot more soft in regards to rate policy. Either you’re not going to raise rates as quickly or you’re going to even in effect, lower rates. And so what had happened was and we talked about this in a previous episode of the podcast was we had one and I’m saying I’m going to put good in quotation marks. We had one good inflation report from July in the inflation report that basically with that inflation report said that we had inflation that decelerated, did not decrease. It decelerated from a previous high of 9.1% year over year to about 8.5% in the month of July. Well, that was the August report reporting for the month of July, down to about 8.5% year over year. Yep. And we’re going to call that good. Once again, I’m using good in quotation marks because that’s still a very, very bad inflation number, correct?

Speaker 2 [00:03:05] Yeah. And the thing of it is, is I mean, you’re seeing with that, that’s the and that’s the overall inflation report. But, you know, people are seeing prices at the pump fall. People are seeing some food prices fall. But, you know, we’re looking at year over year of 8 to 9% this past summer that we’ve been having. And the the the Fed wants it to be at two. And let’s think about the last ten years. We were under two. You know, over the last ten years, year.

Speaker 1 [00:03:31] Over, we’ve had historically low inflation for the last decade. Yeah, correct.

Speaker 2 [00:03:34] So we’re looking at the opposite end of the spectrum here in terms of what we’ve been dealing with. And that’s what’s causing a lot of the volatility in the market. This this this summer has been one the rate hikes that the Fed’s been aggressively hiking the rate obviously inflation is the reason that the rate hikes are happening. But that’s what’s that’s been injecting a lot of volatility to market not just the stock market either. And I know we’ve talked about this on a couple of our other podcasts in terms of what happens to the fixed income market and bond market in general if the rates go up on rising interest rate environment, what happens to the the bond market? So yeah.

Speaker 1 [00:04:16] Well, so speak a little bit about why is it that they’re so singularly focused on inflation? Because I think I have a reason. But I’m I’ll ask you first, you know, why is it do you think that they’re so singularly focused on inflation to the point that they’re they’re probably, in all essence, driving us into a recession if we’re not already there. And by most definitions, we might already be in a recession as we sit here and speak. We’ve had the last couple of quarters of negative GDP growth. But but to your point, why do you think that they’re doing this?

Speaker 2 [00:04:45] Well, think of inflation in general as you’re paying more for something than what you were paying for last year at this point in time. So inflation’s causing with inflation being high. Everybody’s spending more money. They’re having to spend more money. And there’s people that can’t keep up. With the demands of okay, was it? What’s the cost of a gallon of milk were last year? What’s the cost of a gallon of gasoline compared to last year? So I think that they’re looking at that in terms of, hey, we’ve got to slow inflation down. I just don’t know that the that this is an interest rate issue right now. The interest rate cause has caused the interest rates have not necessarily caused the this inflation to happen. So.

Speaker 1 [00:05:26] Well, I think from my perspective, because inflation has been so historically bad, I mean, we’re going back to the late seventies and actually we’re beyond what it was in the seventies at one point as far as inflation numbers are concerned. So we’re talking historically bad inflation numbers right now. The market can’t sustain that. The market can’t absorb that. We’ve had all of this inflation really this year in the past eight months. So so far this year, as we sit here at the end of August, the market can’t sustain those inflation numbers over the course of the next few years. And I think the Federal Reserve knows that. And that’s why they’re being so terribly aggressive on raising interest rates, because essentially what the trade off that they’re going to accept and they basically they basically said this out loud last week, the trade off that they’re willing to accept is very volatile short term markets in the interest of even in out inflation for the long term. You know, that’s the game that they’re playing they’re going to accept. And to some degree, I agree with this, but they’re going to, in essence, create some market pain in a more.

Speaker 2 [00:06:31] More.

Speaker 1 [00:06:31] More, more market pain, because ultimately, what happens when you’re raising rates is you are making you’re decreasing the amount of cash available in the marketplace. If you go to get a mortgage, if you go to take out a car loan, if you take out any kind of debt within the marketplace, you’re going to have to pay more for that. So people are making decisions, not only people, we talk about it from an individual perspective, but if you’re a business and we’re going to go out and finance the purchase of another business, well, we have to, in most cases, finance the purchase of that business. It’s the same true for everything else. So if you’re going to limit the amount of debt that’s flowing through the economy, you’re essentially limiting the opportunities for business growth out there. When you’re eliminating or reducing the amount of potential for business growth, you’re going to increase unemployment, you know, and things like that. So in essence, they are acknowledging that they are creating the environment that’s ripe to create a recession, in essence. And they’re doing that knowing full well the economic pain that it’s going to inflict, not only on the stock market, because we’re typically more focused on the market, but just the economy as a whole in order to stem off or curb the rise of inflation. Right.

Speaker 2 [00:07:50] In a lot of the reason why we’re seeing inflation being such an issue right now is because we’re in a if we are in a recession, which, you know, by a lot of technical factors, as we are right now, typical recessions see unemployment rates going up significantly. Right. What happens when unemployment rate goes up? Is there a whole bunch of people out in these restaurants and bars and stores and everywhere else? Spending, spending, spending, spending? No, they’re they’re pulling that back. There’s not as much spending. So it’s simple supply and demand. When people are out paying for the prices and there’s not enough supply there, the prices go up. So they’re paying for those products and there’s not enough supply there. The prices go up. When people are not out doing these things, prices are going to fall down. So essentially what what the Fed’s basically saying is they’re going to do whatever it takes to get inflation to go down. In order to get inflation to go down, we’ve got to get people to quit spending money and doing all the things that are causing the prices to to go up. So essentially, it looks like they’re going to do whatever it can do to push us into a real recession, regardless of what technical factors are in order to fix the inflation issue.

Speaker 1 [00:09:03] And it’s worth noting, too, we are seeing signs of a slowing economy, because what’s been unique about the year so far is that so many families and so many businesses were flush with cash through the COVID years. You know, we had the stimulus checks that came out. People weren’t going out as much. So, you know, there was record high numbers of a record amounts of savings rates, you know, that that had occurred over the last couple of years.

Speaker 2 [00:09:27] When that just wasn’t free money.

Speaker 1 [00:09:28] Well well, we’re not free anymore. So but but all that all that comes due, right? So we had record numbers of savings, which is which was fantastic at the time because people just weren’t going out and spending as much money. Well, now as people are coming out and doing those things in mass this year, as the world has pretty much finally officially said, okay, we’re done with this, you know, they’re spending more money. At the same time that inflation is occurring within the economy, people have basically said, well, I’m sitting on this cash, I’m spending it. It’s fine. I’m still keeping up with inflation. That’s not going to last in perpetuity. And what you’re seeing over the last two months really is you’re starting to see home sales really start to decline like basically every single day over the last two months in response to the raising increasing or I’m sorry, in response to the increase in interest rates, we’re also seeing consumer spending start to level off and even start to decelerate. That’s the big one right there.

Speaker 2 [00:10:22] Well, I actually think I read something last week where the National Association of Homebuilders did come out and say that we’re in a that they’re in a housing recession, housing market recession. So based off the numbers that they look at and they track in that industry that we’re seeing. That’s right in line with what you just talked about.

Speaker 1 [00:10:39] Yeah. So I saw some data about the housing market, especially locally here in the city of Louisville. But yea, when you’re looking at the year to date numbers, the year to date numbers basically align with 2019, which is the last, you know, pre-pandemic year. Right. So it’s down definitely from 2020 to 2021, but it’s still a model 2019. The problem is that number is trending down quickly. Right. And so as we sit at the end of this year, I don’t anticipate those housing numbers to look like they did in 2019 going into next year, 2023. And we saw this in 0809. The housing market typically represents about 28 30% of the economy. When you think about everything that’s involved in a home sale, you have, you know, closing attorneys, you have realtors, furniture suppliers, right. You know, landscaping gardeners. Right. All these different things, all these different home services, appliances and, you know, all these different things that are associated with maintaining and building homes and moving. And that’s a cottage industry into unto itself. So when you slow down 30% of the economy as quickly of a rate as it is beginning to slow down, that’s going to spell trouble. And it’s not just we’re using that as a reference because most people can easily identify with with the housing market, because most people own houses or have. And in the past. But it’s every facet of the economy, right?

Speaker 2 [00:12:05] Yeah. Yeah. And I don’t want anybody to get confused saying that we’re trying to compare what’s going on right now to 2008 and 2009. Is that was that housing crash was caused by something completely different than what we’re seeing right now. There’s the issue right now is with the interest rates rising, the banks and businesses have, like what you mentioned already, a whole bunch of cash on on hand. So they’re not necessarily going out and going out and borrowing in order to try.

Speaker 1 [00:12:34] To lend it back.

Speaker 2 [00:12:35] In the back out. So the interest rates aren’t affecting them. They’re rising interest rates aren’t affecting them as much or as quickly as it would have in the past in that type of a situation, because of the amount of cash is a that influx into the economy over the last couple of years. Yeah.

Speaker 1 [00:12:50] So here’s a loaded question. What do you anticipate the Fed policy to be over the next few months, maybe through the end of the year? And where do you see us being kind of set up for 2023?

Speaker 2 [00:13:02] I do think they’re going to continue to raise to raise rates. I’m going to go on first disclosure. I’m not going to all disclose them.

Speaker 1 [00:13:09] We don’t all disclose or we don’t have magic balls here.

Speaker 2 [00:13:12] Yeah. I don’t get paid to predict the market or what the Fed’s going to do. So I’m not going to do that. I’m not going to say, hey, this is what I’m going to expect this to happen. I don’t know what the market’s going to do in terms of where that is. Based on the comments the and based on the information that we have, I would expect them to raise interest rates again in September. I would possibly expect them to raise interest rates again in October. I’m not going to say how much I think that that would be bad because that’s just not what we want to do. But I would expect interest rates to continue to rise. I think that they will use the data that’s going to come out in the next few weeks, in the next few months to kind of guide them on where this is going to go. But if we continue to see inflation going down, you know, that hopefully will be a good sign for them. But if we continue to see inflation move up or go beat the expectation or be higher than the expectation is to be, then you know, this could go on for significantly longer. I do think that the market was pricing in over the last rally that we had the summer was pricing in that the Fed was maybe going to slow down interest rate hikes and then potentially even cut them a little bit in 2023. And doesn’t based on the meeting last week, it doesn’t seem that that’s going to be the case any time soon.

Speaker 1 [00:14:37] Yeah, I think when you look at the analysis of what the Fed policy has been previously or I won’t say necessarily the Fed policy, but what they have done and when you look at their previous actions, I should say their previous actions have shown the Fed to basically when we’re looking in times of, you know, times of recession, they typically will continue to raise rates and keep raising rates even further until we are really in. Until there’s economic pain. Right. Whether you want to call it a recession, whether you want to call it something else. And so until there’s really a good amount of pain within the market and the economy as a whole. And at that point, because the Fed really only has two things they can do. They can raise rates and they can decrease rates. At that point, you’ll start to see a decrease in rates and people coming back in and bringing capital back into the economy. And that’s when we start to see the recovery. All right. So now, once again, these are not predictions. This is not investment advice. Don’t take anything I’m saying as gospel. But if I had to guess, I think we’re going to continue to see a very hawkish Fed through the end of the year, definitely through September and October, probably through the end of the year until we really start to see some. Because I think honestly, what I think they’re trying to do and we’ve talked about this before, I think they’re trying to create the recession so they can create the recovery. Right. They almost want to get it over and done with. And they want to speed up the what typically is a full economic cycle that maybe 7 to 10 years. I think they’re trying to condense within a matter of two, three years. Right. And they’re willing to trade. Very volatile a very volatile market in the short term in order to to curb long term inflation.

Speaker 2 [00:16:11] What would your take be on, you know, where do you stand on that stance there on the side of the opinion that, okay, what if they were not as hawkish in this meeting and they were believing that, you know, we aren’t where we’re going to slow down on the rate hikes. But on the flip side, it doesn’t hurt. Inflation continues to go up. So I’m almost in on the on the opinion that they have to take this type of a stance. You’re already there. You’re already been doing this. You have to take some type of a stance like this and continue to go for at least a little while longer.

Speaker 1 [00:16:46] Well, it’s like those old Choose Your Own Adventure stories from you’re an elementary school, right? You know, you can go down a path. Your path B path is you know, we we maybe don’t adjust interest rates as aggressively as we have been, but you’re going to excuse me continue to see increased inflation rate or, you know, we’re going to have very serious short term market volatility in exchange for a lowering of the inflation rate. Long term, I’m going to take option B, I’m going to take that lower inflation, because when you’re building out, especially in our business and we’re building out financial plans 20, 30 years down the line, we’re not assuming 8% inflation rate. That is a serious, serious danger zone. And that, quite frankly, is not sustainable for most people in this market. Right. In any market, quite frankly. And so inflation from a longer term perspective is going to cause a is a much higher threat than short term market volatility. We always have short term market volatility. You know, every four years the market’s going to have one really bad year and, you know, on average about three up years. This is the one bad year. And I think that’s that’s that’s the thinking behind the decisions that they’re making at the federal level, is that they’re they’re willing to trade some some short term pain for long term economic growth. Right. You know, with the lower inflation rate, inflation is a good thing when it’s in check, right? If you’re managing inflation roughly between two, 3%, that’s somewhat healthy for the economy and that’s good for a lot of different reasons. And that’s maybe another episode. But inflation at eight, seven, eight, 9%, that’s just it’s not sustainable for the economy. And they have to be as aggressive as they possibly can in their in their defense to to cut that off. Yep. So. Anything else to add?

Speaker 2 [00:18:40] No, I think I think we covered this one. Well, we could probably do multiple episodes on something like this on this topic here right now, just because there’s so much that surrounds it. But.

Speaker 1 [00:18:51] Well, I think right now our main goal was, you know, this all happened on Friday. We had a really bad day in the market on Friday. Is the market response to the Fed’s announcements was the market drop? The S&P dropped 3% in one day. The NASDAQ dropped by 4%. Just a seriously, seriously bad day in the market on Friday after what had been a decent little run since the beginning of June. Yep. Since June 16th. The middle of June. Yeah. I think the market lows. But once again that in quotation the market lows for the year so far occurred I think it was June 16th or 17th. But we’ve had a nice little bear market rally since then. We’ll see if we retest those lows. I’m a little I’m a little afraid that we probably will. To be perfectly blunt, once again, I don’t know. And I very much hope that I’m wrong, but I think that’s just the environment that we’re in. I mean, we have to navigate it just like we would any other bear market. I think this is going to be a little bit more of a, you know, prolonged bear market than maybe we were hoping, which is okay, as long as we get the fundamentals of the economy in check before we have. You know, the recovery comes into place. And I think once again, I think that’s what the Fed is trying to do. I think they’re trying to force the recession. They’re trying to force the pain, so to speak, so they can start to rebuild and get the recovery on track. So with that being said, if you don’t have anything else to add, Aaron, I’ll start to wrap it up. If you have any questions about inflation or how it pertains to your individual circumstance and how you are preparing for the inevitability of inflation within your portfolio, if you’ve not done so, please give us a call. 502 205 210. You can also visit our website FWB Partners dot com. You can even schedule a meeting directly from our homepage. Once again, we appreciate you listening to us on whatever platform you’re enjoying our content. If any of your friends or family might benefit from anything that we had to say, we would greatly appreciate if you share it on any other social media channels or even just individually among yourselves. So we appreciate you spending some more time with this, senator.