Powell Starting to Change His Tune

Federal Reserve Chairman Jerome Powell should have started the November Federal Reserve meeting press conference with one of the more widely used movie quotes, "there's a storm coming." Chairman Powell's comments after the Fed meeting were certainly the most hawkish we have heard from him.

First, the Federal Reserve Board unanimously voted for the 0.75% rate hike. That alone is a sign that all members of the Fed believe we still need to slow the economy to fight inflation.

During the press conference, Powell took this perhaps another step further when he was asked a question and responded that inflation hasn't been coming down as fast as the Fed had hoped.

Powell's answer about inflation not coming down as his team expected came after he indicated the likelihood of a soft landing was diminishing. Powell mentioned that November's 0.75% hike, the fourth hike of that amount in four consecutive meetings, was "fast pace," however, he also insisted that it was "appropriate" given our current situation, referring to high inflation.

Powell also stated the Fed has some ways to go with future rate hikes. He continued, "We may move to higher levels than we thought."

Another concerning statement came when Powell said, "the question of when to moderate the pace of increases is now much less important than the question of how high to raise rates and how long to keep monetary policy restrictive."

I had written in the past that I felt the Fed Chairman was "sugar coating" the inflation situation to help stabilize the economy and the market's reactions to his comments.

However, Jerome Powell's comments on November 2, 2022, were the first time he did not come across as soft or sugar-coating about what is happening with inflation and the economy. In several ways, the Federal Reserve Chairman is telling the world that inflation is enemy number one and that what the Fed has done up to this point is not working.

So, what does this all mean for the average investor?

As Powell said, the most likely outcome is falling into some recession. Obviously, no one knows how bad the coming downturn will be or how long it will last.

But, based on Powell's comments and those from other Central Bank officials worldwide, it is tough to deny that we are, at best, heading into a recession, if not already in one.

Therefore, the best thing to do is protect your investment funds. The best thing to do is hedge your portfolio. You can do this in several ways, which I have explained over the last few months.

You can invest in short Exchange Traded Funds like the Direxion Daily S&P 500 Bear 1X Shares ETF (SPDN). This ETF will increase in value as the S&P 500 declines in value, which is very simple.

Another strategy would be to buy ETFs that short long-term Treasury Bonds. Something like the Simplify Interest Rate HJedge ETF (PFIX) has performed amazingly well in 2022 as the Fed has increased interest rates.

One more investment you can make is buying an ETF or group of ETFs that will benefit from a rising dollar.

As we have seen over 2022, as the Fed raises rates and US Treasury Bonds pay a higher yield, investors worldwide have flocked to the US dollar. This has sent the dollar higher and brought other currencies lower.

With Powell saying he doesn't know how high he will have to raise rates, there is a good chance the dollar will continue strengthening. Buying an ETF like the Invesco DB Dollar Index Bullish Fund (UUP) will help your portfolio if the dollar strengthens and stocks continue to fall.

When the markets seem to be falling every day, and your account balances continue to decline, you want to keep a clear and focused head. That means you probably don't want to panic and sell out of all your long-term positions.

But you also don't want to sit there like a deer in headlights and watch your portfolio bleed.

Hedging your long-term investments with some small positions that will benefit if the market continues on its current course is a smart way to help ease the pain of a bear market.

Matt Thalman
INO.com Contributor
Follow me on Twitter @mthalman5513

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.