The pivot
The FED is trapped!
The recession is finally showing up in numbers. Unemployment rate is going up, and we are starting to see companies start to miss earnings. That includes tech companies like Twilio, Meta and Google. The advertisers are feeling the pain first. Due to the prediction of the recession, companies are starting to layoff including Stripe, Meta, Lyft. That is just the start of the “second” part of this recession. The FED keeps hiking interest rates, pushing the brakes on the American economy. Powell says he is not going to pivot and will keep raising interest rates. The truth of the matter is that inflation is really high and the American public does not like it and elections are happening. That’s why the FED is raising rates right now.
But what is also true is that the FED can’t keep interest rates this high, interest expenses are predicted to amount to almost 1T dollars per year. That means that the biggest item of the Federal government will be paying off interests of the loans that it acquires. Adding that to the mix, interest rates this high will cause the economy to slow down significantly. Oil prices are high in historical terms and the government is still dumping their reserves. That means that once they stop dumping it, the price will go much higher. That is likely to happen after elections. On top of all, the dollar index is historically high. All of these 3 factors combined will send the economy to a halt. That’s just the beginning of 2023.
Interest expenses increase pressure with the federal government. Plus, unemployment rate will go higher. When more companies like Meta start laying off people, the public will put political pressure into the government and the FED. Plus, the treasury market could see some problems. One way or the other, the FED will have to pivot. The question is when, not if. But even after the FED pivots, it will take time for the effect of it to happen in the economy. That means that the next year will likely be a tough year for the economy. But the FED will pivot. Tech stocks and hard assets will start to go up, and the dance will go on. Structurally, that means that the FED is trapped and even if inflation goes down for a year or two, the underlining policy will remain the same. But this dance won’t last forever, and we will see the end of this madness at some point. In the meantime, we should all dance 😊