The Fed are “consensus thinkers” rather than forward-thinking or inventive, contends Ken Fisher in a video posted to Fisher Investments YouTube channel. The Fed is “more political than they want you to think they are,” and they believe many of the same things that most investors and Wall Streeters are already thinking. Just looking at 2022 proves his point, Fisher insists; at the start of the year, the Fed was vocal in their belief that inflation was transitory. In May, they stated clearly that they were not going to raise interest rates 75 basis points, only to turn around the following month and do exactly that, and repeat the same rate hike at the next four meetings.
The Fed “themselves don’t know what they will do,” Fisher reiterates in the video, or even how they will think or act in the next few months. Usually when the Fed raises rates, it raises the costs for banks loaning out money and in turn lowered the profit margins on lending. As a result, lending becomes more and more constricted, with banks pulling back on new loans as well as outstanding loans, which generally leads to economic contraction. But in the current environment, banks are already “overloaded with near zero cost deposits,” Fisher says, so the spread between those deposits and long rates hasn’t gone up much at all. Therefore, lending has actually stayed quite solid. Given that discrepancy, investors would do better to check in monthly to see how robust loan growth is, rather than following along with what the Fed is doing. Most investors assume that if interest rates are going up, that’s going to slow things down, but loan growth is a much better indication of how the economy is doing.
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