This Is the Worst Fed Policy Mistake Since 1929

A big down day for stocks… More troubling economic signals…

Let’s break down what’s happening with the Fed’s policy and what it could mean for your financial future.

The Federal Reserve has kept interest rates unchanged for 12 months straight. This has only happened once before – right before the 2008 financial crisis

Effective Federal Funds Rate

When the Fed funds Rate is above the neutral rate of the economy, monetary policy is considered tight. This tight policy has been in place for nearly 2 years now!

Fed Funds Above 10-Year Treasury Yield

Initially, this tight policy was necessary to control high inflation in 2022 and 2023. However, there’s now strong evidence suggesting inflation is stabilizing. With each passing day, it becomes more likely that the Federal Reserve may be making a huge mistake by maintaining such restrictive policy.

Interest Rate, Inflation and 10 - Year Yield

Historical Context

It doesn’t matter what the “experts” tell you… No 2 market cycles are exactly the same.

Of course, it’s easy to look back and compare the current volatility with other major ups and downs. But history tends to rhyme rather than repeat, meaning it’s a better guidebook than it is a set of hard-and-fast rules.

Now, history can help us identify and navigate market trends, as well as understand investor sentiment throughout time.

1. Pre-2008 Financial Crisis:

For a year and a half leading up to December 2007, the Fed maintained tight policy.

Result? The global financial crisis.

Ben Bernanke, the Fed chair at the time, later expressed regret for not cutting rates sooner.

Fed Funds Above 10-Year Treasury Yield

2. Late 1920s:

From January 1928 to October 1929, the Fed kept rates above the neutral rate.

Result? The Great Depression.

In hindsight, the Fed has accepted this as a policy mistake.

Fed Funds Above 10-Year Treasury Yield

3. Today:

We’re now approaching 2 full years of restrictive monetary policy – the longest period since those 2 episodes.

Fed Funds Above 10-Year Treasury Yield

The Warning Bells

The Federal Reserve operates under a dual mandate:

1. Full Employment:

Current data shows the economy may be deteriorating:

The ratio of employed to unemployed has been rising aggressively throughout 2024 – indicating businesses are beginning to lay people off.
Hiring has now dropped to the lowest level since 2020.

Employed to Unemployed

2. Stable Inflation:

Yes, inflation was hot in 2022 and 2023. But now? It’s cooled dramatically.

Core inflation is at its lowest levels since the pandemic.
Month-over-month core inflation is hovering around 0.1%.
This is similar to 2009-2020 levels, which the Fed considered too low.

Both mandates now point to the need for interest rate cuts. However, at the recent Jackson Hole meeting, Fed Chair Jerome Powell indicated:

They plan to begin interest rate cuts starting in September.
But they don’t plan to reduce rates to non-restrictive levels until April 2025.

That’s another 5 months of tight policy! Can the economy handle it?

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The Stock Market Paradox

You might be wondering: If the economic situation is concerning, why is the stock market performing so well?

The market isn’t always rational

Let’s shatter a common myth: the stock market is not a perfect machine. It can be, and often is, irrational about the future and for longer than you might expect.

1. The Roaring 1920s:

Markets soared to unprecedented levels right before the Great Depression. If investors had known about the impending economic downturn, this wouldn’t have happened.

2. The Financial Crisis of 2008-2009:

The stock market was in complete collapse in early 2009. This was just a couple of months before the end of the recession and the start of a spectacular recovery.

Don’t Let Volatility Turn You Into a Bear Just Yet

Yes, we’ve had a big down day for stocks. But we’ve recently seen a long-term bullish signal called the McClellan Breadth Thrust.

This occurs when the McClellan Oscillator goes from oversold to overextended in a short period.
It means the market went from extremely panicked to very strong quickly.
Historically, this leads to high returns in the short term.

We saw this signal in October 2022 and March 2023, as well as in November 2023 and May 2024. All signals were followed by upside in US stocks

The McClellan Thrust earlier this year prompted us to double down on our bullish positions, which paid off in July. View our 2024 track record here.

Our Short-term Outlook:

The stock market could remain strong for at least a few more months.
Stocks are currently overextended and could see some consolidation.
Unless there’s another big shock in economic data, the market could remain “irrational”

While the market looks strong now, remember the underlying economic concerns. The Fed’s restrictive policy and warning signs in employment data means you should stay prudent.