FED Funds Rate into 2023

Why do we talk about future especially on New Years?! Because it is FUN! Part of human nature to ponder, question, extrapolate…

Ok so let’s have a look at FED Funds Rate. (that is the rate that banks charge each other)

6 months to me has been the window I will look at. I think it’s a reasonable time period to estimate. Then after that point everything is subject to massive change. Of course things can also change immediately.

Next year mid-year is a critical junction point to me. Plenty of the data lags will surface in addition to some ramifications of recent rate hikes which affect businesses as well as consumers. These rate hikes can have a strong effect on the labor market, economic growth, cost of debt, business margins, household debt, and much more. Valuations come down in a higher rate environment as risk free rate rises and the cost of money is higher. Therefore, mid 2023 is a junction point to me. I think we may continue lower or range bound and then we will revise to lower or higher depending on the FED. If something “breaks” in the economy we can see a potentially different message but until that point, reducing inflation is the primary focus. Therefore, the FED is very hawkish.

I will estimate that inflation will not come down as much as the market estimates which I believe is about 2.5% by mid-2023. Many market estimates are based on this assumption which I disagree with at this time. Of course, the analysts will follow the market beliefs and base their current estimates on that number but most likely will revise accordingly as new information surfaces. Therefore, I am taking a leap here. I will presume that we will have inflation stuck in the 4-6% range for some time as it will take time for inflation to work its way through the system.

Looking at FED funds rate, it appears they don’t really know much after mid-2023 as they are assuming a reduction in the rate with no real basis for it except that market assumption of arriving at 2.5% inflation. What a rude awakening it will be if they don’t receive it. So they will modify their predictions accordingly.

This is fun so I will continue. What do I have to lose besides being wrong and losing less money. If I stay more conservative I lose less except for opportunity costs but I will move quickly if things change near term. We will watch the data closely.

A pause may be possible in spring. Maybe after March we receive a pause. Then the FED may realize that it was too premature and then they continue. Contrary to this chart, I think FED funds rate could go over 6%. The only cut in my opinion is December 2023 and that is if they pause too early and also continue raising into fall. Otherwise 2024 will be when they could begin cutting rates again. However, bear in mind that historically rates are not that high overall.

With all this in mind, what am I doing into the 1st half of the year? Holding more cash than usual which is at about 50%. I am liking commodities – metal including silver, gold and sugar CANE, biotechs and medical, some “select stocks” and other asset classes. If we get a stagflationary environment next year, then commodities do tend to perform better than other asset classes.

Most likely we will have elevated inflation, weaker growth and another bad year for risky assets which can lead to a financial crisis.

Unfortunately, back in 2020 when governments all over the world decided to “spend now and deal with the consequences later” they also allowed a potential 2008-style problem. Anything is possible now with stagflation most likely in the next year.

Do not rush. Stay patient. Better days are coming. Opportunities are incoming. Remaining liquid to seize them is important.