The State of the Market w/ Sam Ro

The Fed on Wednesday raised interest rates by 0.75% basis points, the biggest rate hike since 1994. This historic move comes after inflation rose 8.6% in May compared to a year ago, marking a 40-year high. Fed chair Jerome Powell signaled that a rate hike of this level is also on the table for the July meeting. In a news conference following the June decision, Powell said “we will however make our decisions meeting by meeting and we’ll continue to communicate our thinking as clearly as we can”.

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Sam Ro, founder and editor of TKer, told The Yield “it’s not about the Fed and how good they are at tightening monetary policy, but it’s just a question of ‘does inflation come down?’ and what is the path to getting inflation back to the core levels.” 

When it comes to rate hikes and what the Fed’s decisions mean for consumers, Ro said  “if the rate hikes are on the higher end, then suddenly you have confidence in this financial institution that is really at war with inflation and that makes people feel good and so maybe an increasingly hawkish Fed is the kind of thing that gets the stock markets and financial markets to go risk on.” 

When it comes to the possibility of a recession and how markets are reacting or will react, Ro said “There’s all kinds of things that are already telling you that expectations for a recession are either completely priced in or largely priced in” and he went on to say that what it really comes down to is inflation and if it’s actually under control because at the end of the day that’s what’s driving the Fed’s decisions.

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While wages are increasing, the prices of goods and services are increasing as well. Food prices climbed 1.2% in May while energy prices rose 3.9%. Wages were strong in May with hourly earnings increasing 5.2% which, while good for workers, keeps pressure on the Fed to cool down the economy and the job market. Ro warned that consumers need to be realistic when it comes to rising prices, he said “the idea of inflation coming down, people should, you know, sort of manage their expectations there…price levels might actually stay high and we might have to get used to $5 gasoline for a really long time.” He went on to say, “in an economy where the higher levels of prices are sustainable…it’s only sustainable if people can afford to pay it”. 

Ro, however, does see a bright spot amid the uncertainty. He said “the Fed I don’t think would have been comfortable with tapering, quantitative easing and raising interest rates…if it didn’t think that the economy had some momentum”

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