The poor economic policy of the past is coming home to roost in the form of rising rates and spiraling inflation. To make matters worse, policy leaders spent months gaslighting us all, denying inflation’s presence when the signs were in plain sight. This lag in taking action has surely exacerbated the situation because it’s best to nip inflation in the bud before it blooms. Too late for that. 

The Fed raising interest rates is the preferred policy response for a number of reasons. This is primarily because extracting the excess liquidity forced into the system by the same hands is a more direct and painful course, and it would agitate voters. Two other ways they could extract that liquidity would be to change bank reserve requirements to a lower multiple to constrict lending or alternatively, they could raise taxes. Don’t expect that with an upcoming election. 

Of course, on the other hand, raising rates agitates the stock market, as it factors in slower future growth and reduced economic activity because of more expensive borrowing. Those higher borrowing costs also affect company margins. Many companies would also have rising feedstock supply costs. While stocks are generally valued based on future earnings, many participants also determine whether to invest in stocks after comparing the risks and returns of stock investments to the risks and returns of the 10-year treasury. This risk-free alternative sets one price metric when it pays 1% and sets quite another at 3.89%, like today. 

Given the chills that I get on 500-point down days and the compulsion to raise cash, I’m guessing we’re getting close to the end of the hike cycle. My buddy in the concrete business says new house activity is slowing sharply, and he’s the first to know. This signals the slowdown in economic activity the Fed is hoping to achieve by raising rates. 

Over 38 years of watching similar machinations, I have learned to make fewer rather than more changes to investment policy action. When it comes to money, beware of anything you feel compelled to do. This maxim is true whether buying or selling. 

We have survived much higher rates before, and the end of those cycles kicked off the strongest bull market in history. So while getting to that point might be painful, long-term investors should see adequate reward for their patience. 

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