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Talk, Talk, Talk - The Fed’s Plan To Fight Inflation

Steven Place  |  August 31, 2022

When the Nasdaq finishes down 4% on a Friday, it’s a firm reminder that we have not defied the laws of supply and demand…

We’re still in a bear cycle that’s very sensitive to changes in monetary policy.

At Jackson Hole last week, Jay Powell was running his mouth about the Fed’s commitment to combating inflation…

Telling us all once again how “super, duper, for real serious” the Fed is about rate hikes that the bond market has already priced in.

But that wasn’t the real reason he couldn’t shut up about rate hikes… 

The S&P is up about 20% from the bottom and the Fed wants to make sure that markets don’t run too hot. 

This is the 800 pound gorilla in the room… the real truth is that the Emperor has no clothes.

They have to sell “rate hikes” so there isn’t excess speculation to drive up the markets too much…

But they don’t want to oversell the narrative either, or it could spill over to the credit markets. 

If liquidity gets too tight, they’ve got an even bigger mess on their hands…

They’d be forced to cut rates again which would make inflation worse.

So in between rate hikes, they head out to vacation at Jackson Hole and rattle sabers about how committed they are to raising rates.

And if the “risk off” trade starts going off the rails, then they’ll hatch a plan to stick to their plan.

Confused yet? 

Let me take this tangle up bag of snakes and lay ‘em out straight for you…

What the Fed is doing isn’t really directly turning the knobs and dials of the market.

Instead, they’re creating a narrative that changes the way market actors behave.

But market actors are themselves creating their own narrative through price action…

Because price reacts to expectations about the future.

So this “narrative about a narrative” -- or “Metanarrative” is what the Fed is manipulating right now.

Basically, the Fed has a crafty and well-thought-out plan to handle inflation… talk, talk, talk.

Since you read Market Traders Daily, you’re highly informed and “in the know”.

So you get that the Fed needs buy in on their future actions or they’ll give away their hand.

And if they don’t keep up the narrative, liquidity could dry up… and that would cause the wheels to come off.

If the Fed does their job right, the markets will correct deeper when inflation is priced in… 

And that will mean a sideways grind to lower levels of inflation with no catastrophic plunges off a cliff.

Now, sideways markets aren’t great news for “buy and hold” in the near term…

But there’s always a few hiding out in the soot… stocks that will rip roar to 50%, 100% or even 1000%+ gains…

How can you find them?

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Steven Place
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