SGOV - 'Skip' QT And Higher For Longer - Not Bullish

2023-06-15 17:30:00 ET

Summary

• On June 14th, Fed Chair Powell announced a “skip” with ongoing quantitative tightening (QT) and possibly further hikes in 2023. When asked about rate cuts, Powell said they would likely be “a couple of years out.”.
• Not easing for two years would be the harshest monetary medicine in decades, potentially leading to increased unemployment and insolvency.
• Longer term, an extended cleansing out of speculative behaviours, zombie debtors and irrationally high asset prices will set up a secular period of rising productivity and prosperity, unlike anything we have seen since 1982.

A world of bullish commentators assert that Fed pauses are positive, even though the worst economic and stock market downturns have always come after the Federal Reserve stops tightening.

After ten consecutive rate increases and the sharpest rate of change since 1980, yesterday, Fed Chair Powell announced a "skip" with ongoing quantitative tightening (QT) and possibly further hikes in 2023. When asked about rate cuts, Powell said they would likely be "a couple of years out."

Forecasts are hard, and it's worth remembering that historically, the Fed's been wrong on its rate predictions 2/3rds of the time. But even if no further hikes happen, the rate "skip" and ongoing QT is not bullish; not easing for two years would be the harshest monetary medicine in decades.

Longer term, an extended cleansing out of speculative behaviours, zombie debtors and irrationally high asset prices will set up a secular period of rising productivity and prosperity, unlike anything we have seen since 1982. In the meantime, however, the pain is set to be plentiful as increasing unemployment and insolvency test the Fed's resolve.

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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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