The FED (U.S. Federal Reserve Board) chairman Mr. Jerome Powell gave a speech on August 26, 2022, which was quite short and to the point. The chairman said their number one focus was fighting inflation and that was their only focus at this time. It was implied that the FED will do whatever it takes to get inflation down to the two percent range and to keep it at or below that target range.

Globally, stock markets have not handled the speech well, selling off after the speech and remaining weak for the last couple of weeks. The FED chairman’s comments have reinforced the view that short-term interest rates will continue to go higher and stay there longer than many investors expected. The FED is also expected to continue to remove economic stimulus to the U.S. economy and may accelerate the speed at which it does this.

Many economists have increased the likelihood of a 2023 U.S. economic recession occurring and that an economic soft landing appears to be less likely. The historical economic record of the FED has not been great. It tends to provide too much economic stimulus for too long or removes economic stimulus too quickly. These actions have caused market bubbles with interest rates too low for too long or hard economic contractions when interest rates are too high for an extended period.

No one knows if the FED or other central bankers around the world will be successful in orchestrating a soft economic landing for the global economies. The stock markets have already factored in a lot of economic tightening in 2022. Is it enough? Only time will tell. I do feel that the bond and stock markets are close to factoring in the initial FED interest rate increases. Over the next few months, the FED will pause to see what affect interest rate increases will have on the U.S. economy. It takes up to a year for interest rate increases to really show their affect.

If it looks like inflation has or is coming into the two percent range, then the FED will stay neutral, keeping interest rates in place to ensure inflation is under control. Stock markets are economic forecasters so they should rally before the economics confirm if the FED has been successful on fighting inflation.

In summary, we are in the part of the year which tends to be the most volatile period for stock markets, late August till roughly the middle of October. As we go through this period, I will be looking for opportunities to buy market weakness. If you have cash, I suggest we invest it over the next month or two, buying stocks when they are down. I will continue to keep a mostly conservative bias but will take some higher risk where the opportunities allow us to.

If you have any questions or concerns, please feel free to contact me.

Best regards,

Bill Achtymichuk