The FOMC released its latest monetary policy statement. It came a day after the May 2023 CPI report came out showing a slowdown in the rate of price inflation.

The Fed will maintain its target for the federal funds rate between 5 and 5.25 percent. This is the first time the Fed has paused since it started its hiking campaign in 2022.

The statement reads in part: “Holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

The Fed will continue to reduce its balance sheet holdings, which means there is still a policy of slight monetary deflation.

The statement reassured the public that, “The U.S. banking system is sound and resilient.” So you can probably expect another significant bank failure any day now.

It is interesting that Powell is saying that Fed officials may increase rates slightly more in the near future and that they don’t expect a drop in rates for the next two years.

Until the Economy Implodes

It’s easy to say now that the Fed will keep rates where they are or even increase them slightly. It will be just as easy to change course and quickly lower rates again when the economy starts to implode.

Things seem to happen slowly and then all of a sudden. This is especially true when we have a majorly inverted yield curve. In fact, the yield curve has been inverted for many months now. This is the biggest flashing warning signal we could ever hope to receive.

Yet, the Fed is pretending like everything is basically ok. It’s something to the effect of: “Sure, there have been a few banks that have gone under. Inflation has been a bit of problem, but we’re getting that under control. We may have some sluggish growth, but we’ll manage the economy and navigate a soft landing.”

When everything comes crashing down, I’m not sure what the narrative will be. It may be: “Nobody could have seen this coming.” Or maybe it will be: “There were warning signs, but we didn’t want to scare anyone.”

I think the Fed knows that there is major danger ahead. I think their fear of future price inflation is less now, and it has shifted to a fear of a massive economic downturn.

I have said that the Fed won’t purposely bail out the stock market. They will bail out a fragile bond market and a fragile banking system.

The Everything Bubble

We are still in the Everything Bubble. Even with interest rates rising, housing prices are still holding up in many areas. A lot of homeowners actually don’t want to sell because they have a low interest rate mortgage locked in. So it is keeping houses off the market.

But this can change very quickly once prices start to drop and the economy goes into recession.

Stocks have the potential to fall really hard. I’m not talking about 30%. I’m talking about 50% or 60%. Maybe it will be even more, but at that point everything else will be so bad that the Fed is likely to intervene.

Long-term bonds are likely to gain in value as interest rates go back down. This is far from a guarantee, but investors still see U.S. bonds as a form of safety.

Gold may end up being one of the least volatile assets, even in terms of dollars.

Speculation

In terms of speculation, I think there is a play to short the market. The problem, as with most investing, is the timing. The stock market crash could start tomorrow. Or maybe it won’t start until January 2024.

And even when it does start, it will be a roller coaster. There will be short-term rallies in hopes that the Fed will intervene.

It is easy to buy inverse ETFs that go up when the market goes down. The problem with these funds is that they are only good for the short term. You don’t want to buy one of these and hold them for a long period of time. So it really is a speculation, and it is something where you need to be active in monitoring.

I will probably dip my toe in shorting the market in the near term. If the inverted yield curve fails me here, I will probably give up speculating in the investment markets. I think we should trust that a recession is coming.