Fed Good Intentions and Your Trading
As we are writing this, Fed Chair Powell is testifying before Congress. The scrolling text at the bottom of the screen on Bloomberg says that Powell does not intend to cause a recession with his efforts if he can avoid it. It would seem to us that Fed good intentions and your trading may not mix very well. Powell admits that there is little the Fed can do about the supply side of the inflation equation. Although the money that Congress, two presidents, and the Fed threw at the economy during the depths of the Covid Crisis was for good intentions, no good deed goes unpunished.
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Trying Not to Scare the Markets
Going back to Alan Greenspan Federal Reserve Chairpersons have been famous for “Fed Speak.” Everything they say is typically hedged, modified, and meant to avoid driving markets into a panic. Today Powell says that while a recession is certainly possible it is not guaranteed. In the next moment he notes that achieving the desired “soft landing” will be very difficult. The S&P 500 opened by gapping down and rose while Powell spoke only to settle back slightly below the previous close as Powell spoke.
Trading and Fed Speak
The trick when listening to Fed Speak is parsing out what the Fed is really going to do versus how their calming words will affect trading in the short term. When Powell first announced a 50 basis point raise in interest rates the market celebrated with an impressive rally. The next day it reversed course and wiped out all of those gains and continued down for days. Any trading gains from short term market reaction need to come from short term positions. More substantial gains will come from an appreciation of what the Fed is really going to do and the extent to which their actions may help or hurt the market or have no affect at all.
Interest Rate Sensitive Markets
In his remarks before Congress, Powell noted that the housing market is particularly sensitive to changes in interest rates. As such it would not be a surprise to see that a housing stock like NVR is down by a third year to date. To the extent that we can parse Powell’s words and expect to see continued rate hikes this stock will likely keep falling or simply bottom out. It will be when the Fed hints at backing off rate increases or lowering rates that this stock and others in the housing market could begin to rally. This is a great example of why it is not a good idea to trade alone in today’s volatile market. At Top Gun Options we potentially print money when prices are falling, when they are rising, and when the market is trading sideways.
Fed Balance Sheet Losses
When the Fed takes assets on their balance sheet they buy mortgage-backed securities. As interest rates go up these securities go down in value. The current estimate is that the Fed is in the hole by as much as $300 billion. Powell says he does not expect to sell these securities now but could be forced to at some point which shows one of the risks for Fed policy and subsequent quantitative easing. When watching the hearings before Congress it is useful to listen to the questions from the Senators and Powell’s answers. While Powell uses Fed Speak to make the points that he wants to make, he needs to answer the questions Senators ask. The balance sheet losses are one of these points that indicate the sorts of losses that could feed into a worse recession than Fed Speak otherwise indicates and greater effects on the market. To keep up with this in your trading don’t trade alone. Join one of the squadrons at Top Gun Options today.
