The Fed Needs to Raise Interest Rates

Interest rates need to go up. The Fed doesn’t have a choice. Jerome Powell says that these “one-time increases in prices are likely to only have transitory effects on inflation.” With all due respect, that is wishful thinking, bordering on delusion.

Obviously, Jerome doesn’t go to the supermarket. Price increases are once a week there, not “one-time.” And don’t get me started on rising gas prices. Travel restrictions might be lifting, but no one can afford to go anywhere. It will get worse this summer.

Inflation is spiraling out of control and the Fed is refusing to do anything. They buy bonds and flood the US economy with new cash. Meanwhile, property values are going through the roof and the younger generation is being deprived of the American dream.

Cost-Push Inflation could Lead Us into Recession  

These are not normal price increases that can be attributed to a rise in the cost of living. It’s cost-push inflation driven by materials shortages, and it is outpacing wage growth. The last time that happened was in the late 1970’s. Look up “gas lines” and you’ll see the result.

April’s hiring report was 75% lower than projected. Unemployment rose to 6.1%. Those are not the indicators of a growing economy. High prices and a smaller workforce will lead to a decline in economic activity. That will lead to, you guessed it, a recession.

The Fed is trying to prevent a recession by keeping interest rates pinned near zero. That’s sound theory during normal times. It won’t work in this scenario. Raising interest rates now might cause a short-term disruption in the market, but it will stave off disaster later this year.

Jerome Powell needs to listen to Treasury Secretary Janet Yellen. “It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat,” she said last week. “Our economy needs modest increases in interest rates to be competitive.”

The remarks rocked my portfolio, which is heavy on tech stocks and crypto. I don’t hold it against her. In my opinion, the Secretary is 100% correct. As a former Federal Reserve chair, Janet Yellen knows what she’s talking about. Rate hikes must happen soon.

Adjusting Your Portfolio to Prepare for Interest Rate Hikes

I’m not selling my Bitcoin. The lower price makes me want to buy more. I still believe it will hit $100K at some point, maybe even later this year. At $45K right now, it’s a bargain I can’t pass up. Follow me if you will. We can all tell the world “I told you so” in the end.

The tech stocks will rebound. They always do. I’m offsetting some of my short-term losses there by dumping some extra cash into petroleum stocks. Regardless of interest rates, the price of gas is going to keep going up. ExxonMobil (XOM) and Chevron (CVX) are both climbing.

I don’t buy bonds, ever. If you do, now is good time to dump them, before the Fed starts selling again. What little value they hold now will decline rapidly. My safety net account is over at Acorns, where I’m pulling 6% with ETFs this year. What was your bond yield?

Speaking of ETFs, the chart pattern of the iShares Microcap ETF (IWC) is showing some interesting movement. Watch the pennants, my trader friends. It looks like this one is going to breakout this week. There are some serious movers buried in that fund.

Tesla Comes Crashing Back to Earth

After peaking at $880 last January, Tesla (TSLA) opened this morning at a more pedestrian $577.24. Share prices fell two percent during the day, but to me this price point seems right. They were overvalued most of last year. I’ll buy in at this price.

Tesla isn’t the only electric vehicle stock taking a beating. NIO (NIO), my big winner from last year, opened the year at $48.74 and closed this evening at $33.64. Arcimoto (FUV), one of Investopedia’s top picks, went from $13.23 to $7.70 this year.

Much of the recent market volatility can be attributed to rumors of rising interest rates. Now that the winds of uncertainty have started to blow, there’s no going back. The Fed needs to just do it. Someone please tell Jerome Powell. His current plan isn’t working.

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About the Author

The Fed Needs to Raise Interest Rates

Kevin Flynn

A former financial professional and founder of AdvisorScale Financial Writing, Kevin lives in Leominster, Massachusetts with his wife Evelyn, two cats, and nine wonderful grandchildren.