So it looks like the Fed will finally cut rates in September. But by how much? And is it too late? Too early?
After witnessing decades of endless predictions and lamentations about the central bank and its next moves, I have come to a simple and decisive conclusion: Who cares?
Does this sound heretical, or even crazy? If so, listen up. The evidence is overwhelming: Stocks don’t need rate cuts. Whether they cut, raise, or hold rates, the Federal Reserve’s actions rarely matter much to investors, and their rhetoric even less.
Yes, many assume that all the PhDs and institutionalized processes of central banks make them extremely important – with prescriptive statements and actions that have seismic and inevitable repercussions on markets.
Wrong! This is all voodoo.
Take wages, for example. Fed officials consider wage growth to be inflationary. Never! Fifty years ago, Nobel laureate Milton Friedman proved that wage growth always follows inflation—it never causes it.
That’s what happened this time around, with inflation starting to spike in February 2021, eventually peaking at 9.1% in June 2022. At the same time, wages actually declined in the first half of 2021 before starting to recover, peaking at 6.7% in June 2022. Since then, while inflation has fallen precipitously, wages have actually fallen more slowly. More recently, inflation and wage growth have been at 2.9% and 3.9%, respectively.
To sum up: inflation first, wage increases second. Always. Globally too, where the slowdown in inflation has occurred as wages in the UK and the eurozone have surged.
In fact, central banks react to events much more often than they cause them. (A uniform and erroneous economic education fosters stupid groupthink – knowing nods without ever knowing what will come next.)
Central banks issue “forward guidance” when they signal future policy changes to avoid surprises. This guidance is supposed to provide transparency. Instead, it creates chaos when it later deviates from it, which is common.
Example: In May 2022, Chairman Jay Powell said the Fed was “not even considering” a 75 basis point rate hike. It increased that amount next month …and three or four months later. Oops!
This is not an isolated case. The European Central Bank openly predicted that there would be no rate hikes in 2022, but it raised rates by 50bp in July, and then three more times. Six more times in 2023. The Bank of England has also changed its position twice this cycle. They have all changed their position as often as not, and this is still the case.
It’s not just idiocy. The global economy is complex. Data vary. Interpretations change. Things happen. But if central banks don’t know what their next move will be, how will you know? You can’t. Yet pundits continue to stupidly scrutinize political leaders for clues, analyze their words and body language, even interpret their silence.
Don’t worry. Even if you could, it wouldn’t do any good. Think about it: Commercial banks borrow short-term funds to finance longer-term loans. The hikes are designed to raise banks’ funding costs, slowing lending, GDP growth, and inflation.
During this cycle, as I explained in a December 2022 column, the excess of global deposits has kept banks’ funding costs extremely low, negating the power of rate hikes. And the logic behind them (and that of the current reductions). Thus, loan growth remains at moderate expansionary levels.
Does our economy need budget cuts? Apparently not. US GDP has grown for eight straight quarters. Europe’s economic recovery began well before the first budget cuts.
Stocks don’t need declines either. Sure, fear of higher rates partly contributed to the 2022 slide. But the S&P 500 has gained 59.5% since its October low, ahead of six straight rate hikes. And stocks have exploded in 2024, as earlier expectations of rapid rate cuts have imploded.
The European Central Bank raised rates from July 2022. When it first cut in June, eurozone stocks were up 38%. above Pre-hike levels. The Bank of England raised rates 14 times between December 2021 and last August’s cut. UK stocks rose 24% in sterling terms during that period.
With such highs, who needs lows? For all the talk of “high rates,” the federal funds rate and the 10-year Treasury yield are historically quite normal over the long term. Myopia prevents many people from realizing this.
So don’t worry about central banks, whether they are aggressive or accommodative. It’s all an illusion. Enjoy this bull market.
Ken Fisher is the founder and executive chairman of Fisher Investments, a four-time New York Times bestselling author, and a regular columnist in 21 countries around the world.
