Is Fed Policy Actually Tight?

In this episode, Jason Jacobi and Mark Boyer discuss inflation and whether the Fed policy is actually tight. They analyze the recent market performance and the impact of inflation on the economy. They also explore the relationship between interest rates and GDP growth and the potential implications for investors. The conversation highlights the need for a balanced and diversified portfolio, including alternative investment strategies.

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Important Disclosures:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All performance referenced is historical and is no guarantee of future results.

All indices are unmanaged and may not be invested into directly.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Investing involves risk including loss of principal.

Jason Jacobi & Mark Boyer are registered principals with, and securities and advisory services offered through LPL Financial. A Registered Investment Advisor. Member FINRA/SIPC.


Jason Jacobi, CFP® (00:00.686)
Welcome to the closing bell. We’re back with you this week. Jason Jacobi Mark Boyer. Boy, do we have an interesting one for you. We’re going to make it interesting on a boring topic. We talk a lot about inflation, right, Mark?

Mark Boyer (00:09.538)

I’m so sick of inflation, not only because it’s eaten into our wallets, but also I’m just sick of talking about it. But it’s always a subject, right? And this week is a big subject this week with the numbers that came out.

Jason Jacobi, CFP® (00:26.83)
Absolutely. That’s a good point. We’re all sick of talking about it, hearing about it, but we want to put an interesting spin on it this week. So we want to talk about is Fed policy actually tight? Is it a tight money supply? Is this consistent with tight money? Have we seen the economic slump that would be associated and consistent with a tight money supply and tight money policy? So we’ll dive into that in a second, but let’s take a quick look at where we finished for the week.

In the markets Dow Jones finished the week down 2 .37 % S and P finished down over one and a half. NASDAQ actually was a kind of the big winner on the week. It was only down almost half a percent S and P, which is the Russell 2000, um, was down 2 .89%. So again, down week for the markets, nice little downdraft. Obviously we talked about, maybe this is a good, a good kind of breather that we’re finally starting to see after an incredible run.

this last year.

Mark Boyer (01:25.41)
We’ve had a run like no, I mean, we’ve had a long run since early November, right? So, you know, we’re due for a pullback. We’ve talked about that in the past, you know, not not surprised. And it never feels good. You know, anytime you see red like you got, you know, like we’re seeing right now, we’ve had three days in a row of really volatile numbers, right? You’re down 500. You’re up 450. You’re down 500. It’s like, what’s going on? So now the market is just trying to.

You know, it’s, there’s just a battle going on about, you know, where interest rates are headed and really, you know, when did they, again, we’ve gotten to this place in the market where every, only thing people look at is, you know, is a fed going to cut rates? You know, it’s, it’s all about that all the time. And it’s, uh, you know, I think some other things get lost, like, like important things like earnings per share or things like that. I think today on this Friday, you know, JP Morgan came out, you know, uh, with, you know, they beat earnings on, uh, uh, you know, on, on their.

Jason Jacobi, CFP® (02:22.606)

Mark Boyer (02:25.154)
for their quarter, but they sort of guided much lower than the market expected. So that was, I think that kind of added to today’s, you know, drop off. It’s interesting. The Dow has been the, and again, back to the Dow has been the worst hit of the indexes. If you lose that, the NASDAQ looks pretty strong. S &P still above its 50 day. As is the, you know, I mean, is it, is the, let me see, where did Dow end today? Did they end up above? Let’s see here.

Jason Jacobi, CFP® (02:39.182)

Mark Boyer (02:53.186)
Yeah, Dallas, clearly, I mean, we’re down.

We’re down, uh, we’re down 2%, 2 .3 % from, um, their 50 day movie and average on the Dow. So that’s pretty weak. We don’t want to be under there. And we’re down 5 % from its high, which is only, you know, which was only what back in, uh, sorry, uh, March, kind of March 21st area. So we’ve, we’ve, we’ve had a lot of damage in the Dow, uh, those big industrial, um, large cap, you know, companies that are, you know, highly leveraged a lot of them. So they’ve gotten hit.

Jason Jacobi, CFP® (03:04.75)
Interesting. Yeah.

Jason Jacobi, CFP® (03:22.798)

Mark Boyer (03:27.585)
Do do do hit you know because it just rates of you know spike back up to that four point five range this week so anyway Damage there. We’ll see how it plays out, but not unexpected but not not fun to work You know to you know to go through for anybody because you know can it it could continue and then it could actually start to You know be that little snowball right that starts to roll downhill and gets bigger and bigger So we don’t know that’s why you know looking at

What we’re talking about today is pretty important. We’ll see how that, we got a lot to digest the rest of this year. Yeah.

Jason Jacobi, CFP® (03:59.886)
Yeah, absolutely. And we’ll get into CPI and PPI, the inflation numbers on the consumer and producer side of things in a second, but I think it’s worth noting, you know, bonds we’ve talked. And if you have a wealth manager, you’ve talked with one or even yourself have been watching the 10 year, which is kind of like the bellwether, you know, it’s kind of one that we watch pretty closely. You know, a few weeks ago we were down at 4 .3 and change. Now we’re up to 4 .99. You had just said, correct. So quite a bit of a jump.

Mark Boyer (04:28.322)
No, no, 4 .5. We’re right at the 4 .4. It’s 4 .499. Today, we actually closed right below 4 .5%. So 4 .5 is kind of like the market’s going to, you know, the 10 -year is going to kind of dabble around that. If it gets much higher and stays there, that’s not really great for interest rates in the short term.

Jason Jacobi, CFP® (04:31.214)
Excuse me, 4 .5. Gotcha.

Jason Jacobi, CFP® (04:41.774)
Bye. Yeah.

Jason Jacobi, CFP® (04:52.846)
Gotcha. Sorry. I miss miss miss heard you there before, before the, the, uh, recording here. So 4 .4, nine, nine. So we’re hovering right there at the all important four and a half and we’ll see where it goes. But I think again, so we’re going to, we’re going to work our way towards the method behind the madness, the kind of ending point behind the race here that we want to really focus on, um, which isn’t just inflation, right? So consumer price index came out this week, prices that consumer pays, um,

Mark Boyer (04:55.522)
Yeah. Yeah. Yeah.

Jason Jacobi, CFP® (05:19.886)
In my opinion, not as important as PCE numbers, you know, personal consumption expenditure report, which the fed actually watches a little bit closer. Uh, but you know, we had, we had headline CPI come in this week. We had it at about 3 .5. So, you know, it was a little higher than expectations and then core CPI, which excludes, you know, volatile food and energy costs came in at 3 .8 % also.

You know, 10 basis points higher from expectations. So these numbers not catastrophic, but they do signal quite strongly in my opinion, that, uh, the hotly anticipated June rate cut that w that everyone was talking about and hoping for that was kind of helped rallying the markets. Are we cutting rates? Are we cutting rates? Don’t think it’s going to happen. We’ve talked about that. Right, Mark.

Mark Boyer (06:11.138)
Yeah, no, we’ve, uh, we’ve said that was higher for longer. That’s kind of the new phrase everybody’s talking about. And it seems like after every, you know, every inflation report, it was more and more people are jumping on that bandwagon. So, uh, yeah, I mean, we’ve been talking about, we didn’t think they would probably cut rates till second half of the year. Um, and you know, basically this week, I think, you know, and we’ll talk a little bit more about this, I know in this call, in this podcast, but you know,

Jason Jacobi, CFP® (06:15.758)
It hurts.

Mark Boyer (06:41.25)
It looks like the June rate cut looks to be like kind of tabled. And that’s, that’s, you know, but we don’t know that for sure, but the market is kind of pricing that in right now, um, that there’ll be no, no rate cut in June. Um, there’s still some ideas, you know, that maybe be two before the end of the year. Um, I would say that might even be aggressive to think, I mean, this thing could be, maybe we get one, you know, I don’t know two or one, you know, I don’t know yet, but I mean, this fact is.

It doesn’t seem like at the moment that, you know, that what we thought was the tight, you know, if the Fed was tightening, if they tight, you know, it’s tight enough to really impact the economy. And right now it doesn’t, it doesn’t look like it has been. So, um, all that pushes out the fact that, you know, we’re going to be higher in here for longer. And that’s what the markets are, are grappling with right now.

Jason Jacobi, CFP® (07:35.278)
And I think that’s a really good segue, Mark, that you’re mentioning. Are we tight enough? Is the money policy tight enough even with where we’re at in the economy? I mean, you had the PPI numbers come out late this week as well, which is the producer prices that are being paid. That was up as well on the year over year numbers. Month over month was actually fine. The year over year though was the kind of disappointment that kind of seemed to…

point to what we’re going to talk about here in a second, but you look at headline numbers, 1 .6 to 2 .1. So half a percentage point, that’s a big jump. And then core PPI as well, skewed upward, you know, 2 .4 % this morning from an upwardly revised last month of 2 .1. So let’s talk about what we’re going to get in. Go ahead.

Mark Boyer (08:24.898)
Yeah. And all of those saying that like, it’s going the wrong direction, you know, from 22, like we, you know, 9 % inflation and we had this sort of supply side issues with COVID and all that, that, you know, eventually worked its way through. Inflation has dropped, you know, pretty significantly since then, but yet now we’re in this place where if we’re trying to get to 2 % and yet we keep edging back up now, you know, that’s the kind of thing that’s.

Jason Jacobi, CFP® (08:51.854)
Yeah. Yeah.

Mark Boyer (08:54.658)
That’s not where the Fed goes. But again, interesting. Okay. And I’m only bringing this off from memory. We talked about it. So it’s interesting that when you look at the long -term inflation trend over time, over the last 90, 100 years, it’s been anywhere from three to 4 % on average inflation over that period of time, which is where we are right now. And you and I talked about this long ago. The Fed has, you know, in the last 10 plus years sort of had, you know, created this 2%.

Jason Jacobi, CFP® (09:15.406)

Mark Boyer (09:23.938)
you know, goal of on inflation, right? Um, and, and yet the longer term trend has always been three and a half to four, you know, it’s like, well, so there’s somebody wrong here. I mean, can we do life at three and a half, 4 %? I mean, you know, I mean, can we still function? And that’s where I think everybody’s trying to figure out you, you young people. Um, and I say, you know, cause it’s great to be young, but you didn’t live through the seventies and eighties like some of us did. And you know, where.

Jason Jacobi, CFP® (09:25.166)

Mark Boyer (09:53.282)
you know, mortgage rates got to 12, 12 and a half percent. And, you know, you just didn’t think much about it because it was just super high and that’s how it was. And then we’ve had this 35 plus year drop in rates and, you know, especially the last 10, 12 years, it’s, you know, which just seemed unrealistic. That’s why you and I talked about it one time. I mean, will the Fed someday, you know, and I don’t think they will, but will they ever change their, their say, Oh, our targets changed now. I can see it, especially in a foot.

Jason Jacobi, CFP® (10:15.598)
Raise the target.

Jason Jacobi, CFP® (10:19.79)

Mark Boyer (10:21.666)
especially in the election year, they might do it, but man, the markets are crazy if they do that. Oh, we’re good here now. Yeah, it’s all good now. It’s all great.

Jason Jacobi, CFP® (10:23.534)
Yeah. Yeah. We’re good here. We’re good. Yeah. I know. I know. And to your point, you’re looking at, you know, looking since the great recession, people have gotten used to free money, basically, right? Rates near zero. So I mean, yeah, we’ve had rate increases, decreases since then. I remember I got in the industry and they were talking about, and they had some rate increases back when Trump was first president. So, you know, again, so I want to look at where we’re tracking right now.

Mark Boyer (10:37.858)
Oh yeah.

Jason Jacobi, CFP® (10:53.006)
in the economy, we’re tracking real GDP growth at about 2 % annual rate in the first quarter, which is close to the long -term averages. Okay. So we’re right on par. And then we look at, you know, unemployment remains below 4%. Ticking up close to it with 3 .9, ticked down to 3 .8, this most recent reading. But in other words, we really haven’t seen the economic slump, the downturn, the really big downturn, or even like a substantial

reading of jobless claims, unemployment, whatever it may be, we haven’t seen that that would be consistent with the tight money policy. So you brought up 9 % mid 2022. CPI has fallen to 3 .1. It stopped its decline as of late. So what are some of the measures that we’re going to maybe talk about today? Can you kind of look at GDP nominal versus real GDP? What do you think we should be looking at here as we move forward in terms of his tight policy or not?

Mark Boyer (11:50.082)
Yeah, so I think we should, so let’s just say we have great respect for one of our resources for analysis is out of First Trust. A gentleman by the name of Brian Westbury who comes out with a Monday, kind of a Monday morning outlook every week. And I’d like to share some of that. In fact, maybe, I don’t know, Jason, maybe we could put this on the website or something and share this with people.

You know, he, he goes in fairly highly respected, um, economists, uh, from first trust. And, uh, I’m just going to read straight up where basically he makes this ultimately there is an ironclad two -part test to determine if monetary monetary policy is actually tight. First question is, has the economy weakened below trend growth and more clearly is GDP falling or unemployment rising? And then second.

has inflation persistently declined? If those things haven’t happened, it’s hard to argue that monetary policy has in fact been tight, right? So he’s nailing it right there, because neither one of those two things have actually happened. He goes on to say, in other words, we haven’t yet had an economic slump consistent with what we would call tight money.

Jason Jacobi, CFP® (12:55.79)
Bingo. Yeah.

Mark Boyer (13:10.882)
You know, that is a part of that. And so it’s really interesting to kind of history. He goes on this history suggests that interest rates to your point about GDP, which brings us to one signal of monetary tightness that hasn’t yet been triggered. History suggests that interest rates should be roughly equal to nominal GDP growth, which is real GDP growth plus inflation minus a cousin to what they call the Taylor rule. Nominal GDP.

so far is up 5 .9 % in the past year and six and a half annual rate in the past two years. Yet the federal funds rate is still just 5 .4%. If that’s not tight, he says that’s not tight money. Maybe that’s the measure of tightness we should have been following all along, but we have not. So with those numbers, it’s looking like we really haven’t been in a period of time. And this is again, this is one economist’s opinion, but…

Jason Jacobi, CFP® (13:53.87)

Mark Boyer (14:07.426)
Something that more and more looks correct is that we’ve not been in a period of real tightening. Yes, it’s tighter than it was, but not tight enough to actually draw, again, unemployment, increased unemployment, bring GDP down, all those things. All that to say is that it looks like, again, the question comes up, I had somebody ask me, well, do you think, are they going to raise rates? I was going to totally turn around and…

Jason Jacobi, CFP® (14:14.669)

Jason Jacobi, CFP® (14:18.51)
really curb inflation. Yeah.

Mark Boyer (14:35.842)
Possibly the Fed, you know, six months from now is going to have to say, oh, wow, we already went too far. We don’t think that’s the case. And that would be not a very positive thing for markets. We had to raise rates again. It just means that, again, it looks like at this point, the Fed has to keep rates where they are right now with no cutting until there’s clear signs that we have some decrease in, you know, economic activity, higher and higher.

Jason Jacobi, CFP® (15:02.446)
steady downward, yeah.

Mark Boyer (15:05.762)
unemployment and those things that we’re talking about. So yeah, higher for longer. All that to say again, it looks like we’re not going to see interest rates come down. And it’s going to be interesting to watch that 10 -year treasury yield to see how that continues to play around, especially around this 4 .5%, which will be kind of key to see if it can hold that area.

Jason Jacobi, CFP® (15:28.174)
Oh, great points. It’s something that we’ve been talking about and watching, you know, we’ve always, you know, I’m a really optimistic guy. I hate talking about, you know, pessimistic things or like, you know, things are not going to be okay. You know, we get through tough times, we push forward, but you know, it’s something that as, you know, as fiduciaries as we are, we need to be wary of like, Hey, you know, maybe this is a, this is a pretty, pretty well known, like you said, um, opinion that we respect. It’s actually the most read, um, newsletter in the industry.

It’s client approved too. So, you know, if anybody wants it, we can send it to you. But, but, but again, I mean, if you’re looking at it and you know, rates need to be equal to GDP growth plus inflation, nominal GDP, and we’re not there. 4 .4 is not, you know, 5 .9 or 6 .5, not anywhere near that, that kind of benchmark that we look at. So like you said, I think the Fed.

is going to be very cautious moving forward. There’s no reason to cut rates at this point, especially with the economy still humming along the way it is. We’re right on trend with those long -term averages.

Mark Boyer (16:33.474)
Yeah, for sure. So the question is, so what does that mean for investors right now? Right. I mean, that’s kind of the question. It’s like, oh, that’s all sounds good. You guys are all, you know, get it higher for longer, but how does that affect my portfolio? You know, what are your thoughts on that? How do.

Jason Jacobi, CFP® (16:50.318)
So these are, this is not, I’m going to proceed that by a disclosure stating that these are not investment recommendations and that each individual situation is its own. And each client is their own with their own goals and you know, needs. So with that being said, I think in terms of equities, you know, if rates were to go up, that would obviously be a headwind that would hurt corporate profits, which obviously drive long -term stock performance. So that could be a headwind. Um, ones that.

just saying in general here that stocks that, you know, consumer staples stocks that, that can kind of weather or pass along higher costs to consumers or products that people need diapers. So, you know, whatever it may be food, um, kind of those staples that aren’t really going to go away dependent on, you know, consumer spending habits. Those stocks will be able to weather an economic downturn a lot better. Uh, historically speaking.

And then bonds, if rates go up or yields have gone up recently, you know, that will be a headwind for the bond market as well. So you have two asset classes that normally are not correlated. They usually act in opposites somewhat. They’ve actually as more recently as we talked about in our, in our breakfast this week, they’ve been very correlated. They both, both go up at the same time, both go down at the same time, which is, you know, in a retirement account or 60 40, let’s use a traditional aspect.

tends to, you don’t want that kind of movement, that kind of parody. So we’ve actually been looking at alternative investment strategies that could maybe lower risk profile on downturns or downdrafts in the market. And that can maybe smooth out the volatility curve and whether it’s, you know, again, cause law of mathematics, I want to mention this on the podcast. We talked about it this week.

If you lose 10 % in your portfolio, you need to make up 11 .11 % to get back to square one, right? If you lose 20%, you need to make back 25%. If your portfolio goes down 50%, you need to make back 100 % to get back to square one. So it’s not down 10, up 10. That’s just not the law of mathematics. So we really want to be conscious and thoughtful investors for ourselves, for our clients that basically will be able to weather.

Jason Jacobi, CFP® (19:16.494)
different market cycles, which is something that you’ve taught me and you’ve preached since, since, uh, as long as I’ve known you really.

Mark Boyer (19:22.69)
Yeah. Well, it’s, it’s again, the balanced portfolio a little bit. And I think the alternatives, especially new, cause the products that are coming out now in these ETFs, First Trust has a number of them that we’re, we’re, you know, we’re talking about more, you know, things that, you know, used in the, you know, 10, 15 plus years ago, we’re all just for, you know, the big institutional investors, the big endowments, the, you know, the, um,

Jason Jacobi, CFP® (19:46.126)

Mark Boyer (19:50.562)
the schools that have all this money and you can see that they’ve used private equity, hedge funds, all types of things that try to private credit, all these things, mostly illiquid investments that have not really, and high levels to get into, like big money that you can’t get into that now have been sort of packaged and put into the ETFs and funds now that,

Jason Jacobi, CFP® (19:58.126)
I have a credit, yeah.

Mark Boyer (20:19.874)
can really perhaps provide that alternative piece that actually reduces the risk, the overall risk of even a 60 -40 portfolio. But I’m not over the 40. And again, back to stocks and bonds, they have been correlated lately. That won’t last forever, but at this time, it’s still there. So I’m telling clients too, I mean, again, if your cash needs are shorter term,

Jason Jacobi, CFP® (20:38.83)
Mm -hmm.

Mark Boyer (20:47.298)
then you should be in short -term duration kind of bonds, right? So, you know, ultra short things that kind of are that, you know, three month T -bills kind of stuff, areas that are really stable from a principal value. But, you know, you can get five plus percent now in these short -term, you know, accounts that are really positive and then start to build your barbell.

Jason Jacobi, CFP® (20:54.382)

Mark Boyer (21:12.29)
you know, out with your fixed income. So, you know, again, if you needing money and you think you’re going to need money here soon, you know, the shorter duration right now is really probably the place to be. But boy, at some point, if rates, you know, if rates eventually do start coming down and we get what we expect here in the next now, I would say 12, 18 months, we should be, you know, that should be a great investment. We talked about that earlier this year is that, you know, the expectation would be very positive for.

bonds and bond funds and duration wise, but that’s not panning out at the moment. And who knows when it will at some point. But right now, again, you just got to look at your portfolio, make sure that you’ve got your well -diversed life to your point. That’s what I’ve always preached. Got a really well -balanced portfolio, all -weather portfolio that you have pieces of investments in lots of different things, including now the alternative investments. I think it’s a great opportunity for some clients, not everyone, but some.

Jason Jacobi, CFP® (22:10.798)
That’s all we have for you this week in the closing bell. We’ll see you next week. You guys have a great weekend.

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