Fallen Fed: Investment advisers: “Investors should fight the Fed” | news
• Stephen Isaacs sees the Fed on the wrong track
• Investors should position themselves against current Fed policy
“Don’t fight the Fed” – this is one of the most well-known stock exchange rules. What is meant is that investors should align their portfolio with the current monetary policy of the US Federal Reserve and not try to fight against it. Otherwise it could get expensive. But Stephen Isaacs, chairman of the investment committee at Alvine Capital, now advises taking on the Fed in complete contradiction to this stock market wisdom.
They are slurred
In order to cushion the economic burdens caused by the corona pandemic, the international central banks had opened their money floodgates wide. The US Federal Reserve, for example, has lowered its key interest rate to the extremely low range of 0.0 to 0.25 percent. However, the increasing return of the US economy to normal operations after the corona pandemic, combined with the enormous stimulus provided by the government and monetary authorities, did not remain without consequences and fueled inflation. The effects of the Ukraine war and global supply chain problems after the Corona crisis did the rest and even caused US inflation to climb to its highest level in over 40 years in the summer of 2022.
For a long time, however, the US monetary authorities had considered the enormously rising consumer prices to be only a temporary phenomenon. But in mid-March 2022, they could no longer ignore the rampant inflation and raised the key interest rate by 25 basis points. That was the first increase since 2018. Since this turnaround in interest rates, the US Federal Reserve has raised its key interest rate in several large steps to between 3.00 and 3.25 percent.
For monetary authorities, however, this tightening of monetary policy is a balancing act, because while higher interest rates help to dampen inflation, they can also slow down economic growth. As a result, many market participants are now fearing a recession. Nonetheless, Fed Chair Jerome Powell has given a clear signal that he is prepared to continue raising interest rates to fight inflation, even if it leads to an economic recession. The markets are therefore expecting the Fed to raise its key interest rate to around 4.5 percent in the coming months, where it is likely to stay for a long time.
In view of this tension, the actions of the Fed are increasingly being questioned. “The question we need to ask ourselves is, ‘Should we fight the Fed?’ And I’m saying that we should actually consider this because the Fed is fallible. Basically, the Fed has been wrong for two years,” Isaacs, for example, expressed harsh criticism of the Fed to the US broadcaster “CNBC” and even left so far as to go against the common stock market adage “Don’t fight the Fed”. Isaacs accuses the US monetary authorities that they only took serious steps to combat inflation in the summer of 2022 and thus far too late, after they had “still fueled the inflationary fire” at the end of the corona pandemic.
Contrary to widespread market opinion, the investment advisor thinks another U-turn in the Fed’s monetary policy is conceivable: “If the data situation really changes […]then the Fed […] turn back aggressively. And given that the market has priced in more significant rate hikes, it could have a huge impact on asset prices,” Isaacs said.
For the coming months, Isaacs expects a number of “very difficult situations” – including on the credit front. “Something could burst. […] I’m looking for something like that, I’m looking for a potential trigger and I think investors should try to buy assets during this time.”
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