The Fed came out swinging last week and raised interest rates as expected. But somehow, investors and traders were shocked and dismayed. Frankly, I don’t understand why. Fed Chair Jerome Powell and the Open Market Committee have voiced their views for months in a consistent manner. Why is their message over the inflation fight not getting through to most people? Maybe a better question is: When will they stop second-guessing the Fed?

Stop second-guessing the Fed, or you will lose

When you decide to go against the Fed, you’re going to eventually lose. They have an unlimited timeline and a blank checkbook. Those are two extremely powerful and influential tools. With endless time and money, the Fed can influence behavior like no other institution. We’ve seen this play out on both sides of the market.

On the bullish side, the Fed aggressively purchased bonds and backed up other assets to prop up markets in 2020. This flooded the markets with liquidity and probably saved us from a depression. If you were bearish, your portfolio was run over by a freight train. If you were bullish, you had a great run higher – until this year. Today, we face the consequences of the generous monetary policy with a bloated Fed balance sheet and high inflation.

On the bearish side, the Fed pulled liquidity from the markets to reduce its balance sheet and moved interest rates higher. That was a shock to the system this year, and it cast a pall over the stock market. So many people were in denial, repeating mantras of the past like “Don’t trust the Fed,” and “They will never have the courage to make such bold moves.” Seeing is believing though, as the current economy is careening off the rails towards a recession. If you have been bullish, stop second-guessing the Fed. It’s a losing battle, and your portfolio is the one that pays the price.

One year ago this week, I told members in our chat room to write down two things on a post-it note to leave on their monitor or desk:

1. The Fed has changed the game.
2. The stock market will not bail you out any longer if you make a mistake.

Most members listened and have lived to fight another day. We are aware of the market conditions, we remain vigilant, and we wait for the next move in the market. Have these rules made it easier? No. It’s been a very difficult trading year for everyone. But once you stop second-guessing the Fed, trading will get a little bit easier.

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