"I think we'll see 7% interest rates in the next year or two," a colleague told me over dinner last week.
I couldn't have imagined hearing that sentence two years ago. Even today – after living through one of the most aggressive rate-hiking cycles in history – it still seems nuts.
His rationale was logical enough, though... The Federal Reserve keeps hiking rates, despite much lower inflation. And if we get a second bout of price increases like we saw in the 1970s, then much higher rates are near certain.
Again, this train of thought makes sense. And it's enough to keep a lot of investors worried about the new bull market that's underway.
Today, I'll share why the central bank hasn't let its foot off the brakes – and we'll look ahead to why that could soon change...
Fed Chair Jerome Powell didn't give folks much hope when he spoke at the Jackson Hole Economic Symposium last month.
This is the annual "summer vacation" for the economic elite. Instead of making monetary-policy changes, Fed officials flock to Jackson Hole, Wyoming to discuss policy... and share thoughts about what's next.
Powell used his speaking opportunity to give a "State of the Union" on the battle with inflation. Here's how he began his talk...
Although inflation has moved down from its peak – a welcome development – it remains too high.
We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.
In short, Powell isn't satisfied with the recent declines in inflation – at least, not enough to say the battle is over.
That might seem odd. After all, the headline growth rate for the consumer price index ("CPI") – a common inflation gauge – has fallen dramatically. It dropped from a peak of 9.1% last June to just 3% this June. Take a look...
In July, that number ticked slightly higher to 3.2%. But the runaway inflation everyone feared in 2022 has clearly dissipated.
Knowing that, you might question why the Fed continues to be so aggressive. We're darn close to its target inflation rate of 2%. But the central bank has kept hiking interest rates... And Powell's recent comments show he's not convinced that the problem is solved.
That's because the Fed doesn't use headline CPI to gauge its 2% inflation target. It uses the core personal consumption expenditures ("PCE") price index – a slightly different inflation measure that removes food and energy prices, which tend to be volatile.
Core PCE inflation hit a peak of 5.4% in February 2022. And while it's down since then, the June reading was 4.1%. Not only is that well above the headline CPI, it's also more than double the Fed's target...
Regular DailyWealth readers know I found the recent Fed rate hikes to be a little crazy... And I'll be the first to admit it. With headline inflation falling from 9% to 3%, there seems to be little reason to keep choking the economy.
But this chart at least shows some of the reasoning behind the Fed's recent actions. Not to mention, it makes my colleague's concern about interest rates all the more valid...
Any uptick in the chart above could force the Fed's hand further, pushing rates to seemingly unimaginable heights.
The Fed hasn't given up the inflation fight yet. But I expect it will soon... And that fear of 7% interest rates will go with it.
That's because even this more stringent measure of inflation is set to collapse over the next year. You don't have to take my word for it, either – it's what the Fed's own research is forecasting.
I'll share the full details tomorrow... including why this likely outcome is incredibly bullish for stocks.
P.S. Inflation and high interest rates crushed stocks last year. But now, the market is rallying again. And with inflation nearly beaten, the potential for lower rates ahead is another major tailwind that's building today.
This is only part of the story of this bull market, though. Most investors don't fully realize everything that's going on... which is why I recently sat down to cover the full array of trends at work. I also discussed a handful of stocks that I believe could soar hundreds of percent as this bull market accelerates... If you missed it, check out my recent talk right here.
"Speculators are betting that rates will keep surging," Brett writes. "But these traders won't be right for long." A recent bond market signal shows that sentiment is out of whack – and it typically means a reversal is coming... Read more here.
It isn't what most folks would expect – but over the past 40 years, stocks have a history of soaring after the Fed pauses rate hikes. That's because stocks are "forward looking." And with a pause likely on the horizon, now is a good time to be bullish... Learn more here.