As financial markets have become so strongly tethered to FOMC policy, many wait in anticipation of their next move. The coming week’s meeting and subsequent press conference will draw many eyeballs as the committee is expected to raise rates yet again by 75 basis points. 

June’s equivalent hike was met with a small rally, and overall, the market is up roughly 5% since. After this month’s series high inflation print, many anticipated a 100 bps hike, but as FOMC members poured cold water on this idea, the market saw considerable relief.

Will next week’s meeting be welcomed by the market? 

Keep in mind, a 75 bps hike will bring the Fed Funds Rate (FFR) in line with its 2018/2019 peak. Since 1981, the FOMC has been unable to raise its FFR beyond the peaks of preceding tightening cycles. Will they be able to do it this time without “something breaking”?

(Click on image to enlarge)

Michael Lebowitz, portfolio manager at RIA Advisors, likens the Fed’s current situation to the “Trolley Problem” - a hypothetical scenario many might remember from their high school philosophy classes.

Fed chair Jerome Powell has two choices: inflation or recession. Neither of these are optimal, but as the diagram above suggests, inflation impacts the greater number of people. Low and middle-income families struggling to afford essentials like food, energy, and rent will be at the forefront of this administration’s mind as we head into midterm elections. For these reasons, Lebowitz is maintaining a heavy cash position as stocks will be hit hard in a high rate environment.

The portfolio manager does, however, provide an interesting caveat. Along their quest to fight inflation, the Fed will certainly run into some roadblocks - credit spreads blowing up, the stock market crashing, trouble in the repo markets, etc. If this were to happen, Lebowitz begs the question, “do I trust the Fed of the last four months or the Fed of the last 40 years?”

To understand what he means by “The Fed of the last 40 years”, it can be summed up visually in the first chart included in this article. In other words, whenever financial markets have exhibited significant stress, the Fed has dutifully lowered rates to prevent the full extent of the pain. This has led to a series of stock market bubbles, each bigger than the last, with today’s being the greatest of all despite the 20% pullback.

Ultimately, Lebowitz believes that if we do see a liquidity or credit event in financial markets, the Fed will resort to its old ways.

Video Length: 01:00:51

More By This Author:

Eurodollar Futures: The Elephant In The Room Is Signaling A Crash
The Retirement Time Bomb - Explained
Rober Kiyosaki: “Powell Is Going To Channel Volcker? You’ve Got To Be Kidding Me”