Does anyone remember when then President Donald Trump told the American population that the Covid-19 lockdowns and spread of the virus that caused the pandemic would all be over by Easter? Or when referring to Covid-19, that it was “the flu”?
During the first few weeks of the pandemic, President Donald Trump downplayed the severity of the virus to not panic the American population. In hindsight, perhaps the early days, especially when the country was in lockdown, it would have been more beneficial to not sugar-coat the virus and the timeline of when the government would lift the lockdown restrictions.
Had President Donald Trump told people the virus would kill hundreds of thousands of people, perhaps we could have stopped the virus from spreading during the lockdowns.
If President Trump hadn’t given a timeline for the lockdowns and the pandemic seeing brighter days, perhaps the government wouldn’t have lost its creditability with so many Americans during the summer of 2020 and its continued response to the pandemic.
Our current situation with the Federal Reserve and its chairman Jerome Powell, is very reminiscent of the early days of the Covid-19 pandemic.
Back in the winter and early spring, Powell told us that inflation was “transitory” and wouldn’t last. He even said current inflation wouldn’t need aggressive monetary policy changes to fall. Then, even when Powell began to raise interest rates, he told Americans that there was a high probability of a soft landing, referring to the idea that the Fed could bring down inflation slowly and gently.
Powell continued to tell us this summer that raising interest rates gradually and methodically would lower inflation but not put the economy in a recession.
Fast forward to just a week ago, and Powell tells us that the “chances of a soft landing are likely to diminish.” Inflation has hardly moved even though the Fed has raised interest rates five times, starting in March 2022. At that time, the Fed increased rates by 0.25%, 0.50% in May, then a 0.75% bump in June, July, and September.
Powell also said at the most recent Fed press conference following its announcement of the September rate hike that “we have to get inflation behind us. I wish there were a painless way to do that. There isn’t."
The Federal Reserve is increasing interest rates so that borrowing money will become more expensive. Theoretically, fewer people will do it if borrowing money becomes more costly. If fewer people borrow money, spending will be reduced, and thus the economy will slow down. If the economy slows down, inflation or the increase in prices of goods and services will slow.
Slowing inflation is the Fed’s current goal. But Powell is currently sugar-coating that we are staring down the barrel of a recession. As things are now, it is improbable Powell and the Fed can increase interest rates precisely enough to lower inflation without sending us into a recession.
However, just like President Donald Trump didn’t want to come out and scare the world into an all-out panic, Powell is trying to do the same thing. The Fed Chairman wants to warn people but not put them in full panic mode that a recession is imminent.
The fear is that if Powell told us the recession was months away, it would be a self-fulfilling situation. That could be enough to cause people to panic and stop mass spending. A country-wide immediate spending stop would be enough to put the economy into a rapid recession.
One of a few things could happen from a snap recession. One would be the Fed would lose complete control of the situation. They could have a hard time pulling us back out of the recession. Another issue is that the severity of the recession may be worse. Suppose the economy stops immediately, the chances of falling into a profound recession increase.
On our current path, with the Fed sugar-coating the situation and controlling the slowdown, there is a good chance we don’t fall into a long-deep uncontrolled recession.
If you are looking for a few ways to benefit from the coming recession or how to protect your portfolio, take a look at these two articles I recently wrote, Now is the time to Hedge Your Portfolio and ETFs For a Negative Market Turn.
The Direxion Daily S&P 500 Bear 1X Shares ETF (SPDN) and ProShares UltraPro Short QQQ (SQQQ) are two Exchange Traded Funds I discuss in-depth in those articles. But I also like the ProShares S&P 500 Dividend Aristocrats ETF (NOBL), the ProShares Short 20+ Year Treasury ETF (TBF), or my favorite ETF when interest rates are rising, the FolioBeyond Rising Rates ETF (RISR).
If you agree with what the Fed is doing or what you would do differently, let me know in the comments below.
Disclosure: This contributor did not hold a position in any investment mentioned above at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.