Traders And Investors Should Stop Fighting The Fed – It Doesn't Work

"Don't fight the Fed," the old Wall Street adage goes.

The nation's central bank controls a critical asset valuation input, the interest rate. It's the discounting factor of future cash flows of every asset, including equities. Equity valuations are heading higher when the Fed is in an interest rate easing cycle. Thus, it's an ideal time to be on the long side of the equity market.

Conversely, equity valuations are heading lower when the Fed is on a rising interest rate path. Thus, it's the wrong time to chase after equities.

But traders and investors still need to follow the old Wall Street adage. So instead, they have been driving shares higher ahead of Fed meetings that end with interest rate hikes. For instance, on the eve of the September and the November meetings, U.S. equities rallied as traders and investors hoped that the nation's central bank was very close to a pause and an eventual reversal of interest rate hikes.

Unfortunately for these traders and investors, it didn't happen. Instead, the Fed clarified that it's still far from its official inflation target of 2%. As a result, it conveyed the message to Wall Street that it isn't ready to pause and will continue hiking interest rates for much longer to a much higher level than previously expected.

"There are some concerns with the frequency of this year's rate hikes," Kevin Karpuk, chief investment officer at Cornerstone Advisors Asset Management, said in an email to International Business Times. "The Fed is not allowing the economy to process one increase before another is implemented fully."

In the press conference that followed the Fed meeting, Chairman Powell reiterated that failure to bring inflation under control now could result in a prolonged recession in the future, learning a lesson or two from former chairman Alan Greenspan.

"If inflation worsens, a recession will move upon us more quickly than you can imagine, and it will be prolonged," the former Fed Chair said in a Feb. 22, 1989, Congressional testimony — justifying a 50-basis point hike in the Federal Funds rate, from 9.25% to 9.75% a month earlier.

In May of the same year, the Fed paused after the economy slowed down dramatically.

"It's premature to talk about the Fed slowing down," Anthony Denier, chief executive officer of Webull, told IBT. "There won't be a pivot to cutting rates soon with inflation so high because that will destroy the Fed's credibility. But if inflation starts to fall, they could start slowing the pace of rate hikes such as 50 basis points."

Brent Ciliano, chief investment officer at First Citizens Wealth Management, thinks the Fed left the door open for less dramatic Fed action in future meetings. "The committee understands monetary policy impacts the economy on a lag, and the members are willing to slow the pace of hikes as higher rates feed into the financial system," he told IBT. "Markets to remain volatile as investors navigate slowing global growth, inflation and higher interest rates."