The Federal Reserve has inflation in its sights — but this won’t be an easy fight.
That’s the perfect setting for certain trades.
After telegraphing it for months, the U.S. central bank raised its benchmark fed funds rate target by a quarter of a point to a range of 0.25% to 0.50%.
And there’s more where that came from.
The Federal Open Market Committee (FOMC) expects six more rate hikes this year, ending 2022 with a benchmark rate of about 2%.
This is big news in financial circles. Wall Street banks and large hedge funds have entire teams of analysts whose job is to parse these Fed statements and forecast its moves.
But what does it mean for regular, everyday investors like us?
Let’s break it down.
What the Fed Wants to Do
The Fed has two primary jobs assigned to it by Congress:
- Maintain price stability (i.e. low inflation).
- Maintain full employment.
This is a balancing act because policies that keep inflation low also tend to keep unemployment high and vice versa.
The Fed has assorted tools to carry out these two goals, but its most common is the targeted fed funds rate.
When the Fed raises the rate target, it costs more for banks to borrow from each other which encourages them to borrow less. Less borrowing means less economic activity which in turn means slower growth.
It also means less liquidity available to slosh into the stock market.
This is the reasoning for the old Wall Street maxim: “Don’t fight the Fed.”
It’s hard for stocks to enjoy a sustained rise when the Fed is draining excess dollars out of the system.
Why Is the Fed Hiking Rates Now?
In a word, inflation.
The Consumer Price Index — a weighted average of prices for consumer goods — has been running at its highest levels in 40 years!
This is not purely the Fed’s fault. The supply chain mess stemming from the pandemic is another major factor, as are rising energy prices and the labor shortage.
But two years of ultra-loose monetary policy is adding fuel to the fire. And the Fed is trying to slow it down without throwing us into a recession at the same time.
Unfortunately, it’s too little too late.
Once inflation seeps into the system, it a massive challenge to tamp it down. Companies raise their prices in order to get ahead of their own rising costs. It forces other companies to do the same, creating a vicious cycle of price hikes.
Inflation will break. But it will take several rate hikes, and we might be in recession by then.
Until then high inflation will continue to be the norm.
One Way to Trade It
As a father, I don’t like that the cost of my son’s diapers keeps rising and I question the Fed’s decision-making that got us to this point.
But as a trader, I’m not worried about whether or not the Fed made the “right” decisions. I’m focused on finding the right trades to profit — no matter the market conditions.
Today that opportunity lies in gold and stocks of companies tied to gold.
I’m no gold bug.
I don’t have any particular political or ideological bias toward the yellow metal. And I know better than to believe that gold “always” rises over time.
Any look at gold’s history will show you that it’s subject to booms and busts just like any other asset. It just so happens that we’re in the midst of one of its booms. And I think this one has years to run higher.
I’ve been bullish on gold for multiple years now and have recommended various ways to play gold’s rise in Green Zone Fortunes in the past.
And it’s time to get back in.
This month I have identified what I consider the best way yet to get leveraged upside to move higher in gold … but with reduced volatility and increased safety.
I’m only sharing this stock play with my Green Zone Fortunes subscribers. And there’s still plenty of time to get in before gold’s next rise.
If you want the details on how you can join my premium stock research service for less than $4 per month, click here. Once you’re in, you’ll see how we’re playing stock mega trends like renewable energy, biotech and more.
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To good profits,
Chief Investment Strategist