The Fed's Credibility Fight and Where to Invest Now

SPEAKER_1 (0:00)

So joining me now in our studio is Marta Norton, Chief Investment Strategist at Empower. Marta, always great to have you in, especially post FOMC meeting. You know, I won't say the move itself was a surprise. It was pretty much baked in, that 25-point basis point hike was expected. The bigger surprise or the takeaway I keep hearing throughout my conversations today, though, was more the surprise in the direction going forward that this could be a part of a broader hiking cycle as opposed to a one and done move. So how are you looking at what we got yesterday and what we heard and then the market's interpretation of it?

Marta Norton (0:38)

Yeah, it's pretty interesting because I think we were all on pins and needles to see if the Fed actually went through with what I think a lot of different signals were pointing to. Now, I was in the hold camp long term. I thought a lot of the inflation that we were seeing was demand was, excuse me, supply driven and higher rates wouldn't necessarily help combat that inflation. But you have Warsh's address and Jackson Hole that read very hawkish. You had this situation in Iran that is not going anywhere. And then you just have the stickiness of the inflation that we've seen for the past few years. And so I think there was kind of a credibility issue that the Fed had to move. And I don't think anyone really thought past September. And then you hear the comments. You see the unanimity of the committee in pushing this hike through. And it became clear that this isn't just a one-and-done point. And this is something that can weigh on stocks and of course has an impact on the bond market as well.

SPEAKER_1 (1:32)

Certainly. I mean, and I think that that was a bit of the shock too when he said it was a unanimous vote. Yeah. He talked so much about family fighting and he wants a good family fight.

Marta Norton (1:40)

Right.

SPEAKER_1 (1:40)

And to hear that there really wasn't any fighting. And not only that, but the dot plot pointing then to another hike coming forward.

What does that tell you about, you know, there was a lot of conversation about the credibility, especially with the calls from the administration sort of externally. And I think Warsh really tried to put those to bed by not addressing them. But there was some need for credibility here. They got the hike the market wanted. But now we perhaps have another. Does that add to their credibility in just how determined the Fed is to getting inflation under control? And I guess that then begs how high could rates ultimately have to go to achieve that?

Marta Norton (2:19)

You know, the best quote I've seen about this is that modest moves get modest results. And when you look at the history of hikes in different cycles, you rarely see a one-and-done moment. I mean, when you think about what a rate hike is meant to do, it's meant to move these huge boulders of the economy. Inflation, employment, you don't do that by just kind of leaning on the boulder. You really have to push it. And so I think for there to be real credibility, they can't just tweak on the margin. They do have to move. And that's where the risk is. Because when we look at the economy, we have this full force of AI that seems somewhat rate agnostic. But then you have the consumer. And I think the picture there is a little bit more murky. And so you could have demand destruction. You could bring inflation down by bringing that demand and crushing it a little bit. But that's going to hurt the consumer and not necessarily AI. And so I think that's what they really have to wrestle with as they go forward. Warsh seems to think they can thread that needle, but we'll have to see how it goes.

SPEAKER_1 (3:18)

Well, it's a complicated needle because if the consumer is a major part of the concern, we've got the consumer paying record gas prices. I was reading about, you know, diesel hit a new record today, and that will eventually trickle down to the consumer. There was an estimate I saw that said heating your home, it could be as much as 30% higher in the Northeast this year. Although I'll add a caveat, the El Nino is supposed to keep temperatures a little higher this year, according to the National Weather Service.

But as we look at all of that, and now that we potentially have a setup for this not to just be a short-term supply shock, we may be in a scenario of having a sustained energy prices. How different is that scenario then for the economy and the Fed, when Warsh, at least originally, was clear that he also felt this was more of a transitory event?