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The Federal Reserve holds an annual conference in Jackson Hole, Wyoming. The three day event isn’t just a chance for the executives at the Fed to get together for a cup of coffee and a hotel muffin, it’s also an invitation-only event for the world’s most prominent economists and central bankers.
This year’s conference will likely have been the most closely watched in a long time, with the constant cloud of inflation hanging over the entire world, and the Fed primarily charged with dealing with the problem in the US.
The Fed’s chairman Jerome Powell gave his address to the conference and offered some insight on what we can expect from them over the coming months. He didn’t mince words either, stating that the Fed will “use our tools forcefully” in tackling rising prices.
For investors, this means that there is likely to be a lot of central bank intervention to come, with the aim of getting inflation back under control. This could have a significant impact on stock markets, and making the right investment decisions around this is going to be vital for investors.
Let’s dive into Jerome Powell’s comments, the investment opportunities worth considering off the back of them and why, of all places, they hold their conference in Wyoming.
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Powell started with making the point that the Fed’s focus this year is much narrower than in previous years. Generally the central bank’s role is complex and wide ranging, with the need to deal with many different issues facing the economy.
This year, there is really only one. Inflation.
He explained that the “overarching focus right now is to bring inflation back down to our 2 percent goal” and that price stability is one of the most important aspects of the economy.
He made the comment that price stability is vital for a strong labor market, and that rising inflation hits the poorest of society the worst.
That all sounds great, but Powell also made the point that the problem wouldn’t be solved without drastic measures and “some pain to households and businesses,” but that it would be the lesser of two evils compared with leaving inflation unchecked.
In order to tackle the problem, Powell explained that interest rates would need to continue to be raised and would remain high for some time.
Currently the member’s predictions are for rates to average slightly below four percent through 2023, though he hinted that this may be revised upwards at the next meeting in September.
The resolve from Powell and the Fed is clear, with finishing comments from his speech stating that, “We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply, and to keep inflation expectations anchored. We will keep at it until we are confident the job is done.”
Those are some decisive words from the head of an organization that has the ability to impact millions of household’s finances with the click of a button.
As Powell stated in closing his speech, the Fed is able to take steps to reduce demand from consumers. Reducing demand means that fewer goods and services are being purchased, which means prices remain stable or potentially even fall.
The Fed does this by changing the base interest rate. In simple terms, this is sort of like the interest rate that banks themselves pay. Because of that, any change in the base rate flows through to the interest rates that banks use for their own products.
So if the Fed increases rates, it means the cost of borrowing for consumers goes up. Things like credit cards, mortgages, personal loans and store financing will all get more expensive. In theory, this means people have less money to spend on other things, which reduces demand and cools the economy.
It’s a fine line they need to tread.
Raise rates too much, and household budgets are too heavily impacted, spending goes through the floor and businesses start to make much less money. In the worst case scenario, this can potentially put the economy into a recession.
If rates are too low for too long, spending can continue to increase which can create an inflation spiral.This makes goods a lot more expensive and can leave many families behind as they try to keep up with rising prices.
This question isn’t that clear cut right now. Generally, higher interest rates would be seen as a negative for businesses. Less money in the pockets of consumers means less money flowing to companies that make up the stock market, whether that’s Amazon, Apple, Walmart or Visa.
Right now though, the situation is a little different. Inflation is not only an issue for households, but because it’s so high, businesses are really feeling the pinch as well. Costs are being passed on, but there is a limit as to how much this can be done without impacting the demand for a company’s goods and services.
Because of this, recent Fed rate hikes have actually caused the stock market to bounce, on the hope that higher rates will begin to tame record high inflation. This wasn’t the case on Friday, however, with stocks falling heavily off the back of Powell’s hard hitting comments and the S&P 500 dropping 3.7%.
Of course, the stock market doesn’t respond to single issues alone, and there are plenty of other factors at play right now which could impact prices. Either way, there are a couple of ways you can position your portfolio, regardless of what the impact might be.
Firstly, in a low GDP growth or low earnings environment, large cap stocks tend to outperform small caps. Given that the Fed is looking to dampen down an economy that’s already not exactly firing on all cylinders, there’s a good chance we’ll see earnings come under pressure.
To take advantage of this, we created the AI-powered Large Cap Kit. This is a long/short Investment Kit which uses ETFs to take a long position in large caps and a short position in small caps.
It means that even if the market trends sideways or goes down, investors can profit if large cap stocks hold up better than small caps. We use AI to rebalance this kit on a weekly basis, to hold the optimal weights for each trade.
Secondly, if you’re feeling fairly positive about the markets over the coming months, but you want to add a bit of insurance, we offer Portfolio Protection. This is another piece of AI wizardry which takes into account your portfolio position, and automatically implements sophisticated hedging strategies to protect against volatility.
It’s like having a hedge fund manager in your pocket, and it’s available to everyone.
Can’t forget this one. You’d think that the Fed’s symposium would be held in New York, Chicago or Los Angeles. Given that Wyoming is the least populous state in the country, it seems a bit of an unusual choice for a meeting of the brains of high finance.
The answer? Fly fishing.
Yes, you read that right. The first economic conference held by the Fed was in 1982, and the chairman at the time was notoriously difficult to drag away from his base in Washington, D.C.
As a keen fly-fisherman, it was thought that holding the conference in Jackson Hole (which apparently has great fly-fishing) would ensure he turned up. It worked, and the conference has been held there ever since.
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