Rate hike alert: The Fed will completely kill inflation before taking on weak asset prices

Get all the essential market news and expert opinions in one place with our daily newsletter. Receive a comprehensive recap of the day's top stories directly to your inbox. Sign up here!

(Kitco News) - For any investor that's been around for at least 20 years, the concept of "the Greenspan Put" will likely conjure up memories of a time when former Fed Chairman Alan Greenspan was believed to have the market's back, so to speak, if things got really rough.

Under that purported policy, Greenspan's Fed was prepared to intervene in and stabilize financial markets to prevent severe economic downturns whenever there was a significant risk of a crash or crisis.

Fast forward to the present, and current Fed chair Jerome Powell is fighting a different battle in an entirely different way, having already pushed through a dozen rate hikes and moved the Fed's benchmark to a 22-year high.

Despite widespread hopes and growing protestations among many Wall Street pros that it's time for the tightening cycle to end -- especially if the Fed's desired "soft landing" is to be achieved -- Powell's comments after the panel's latest meeting on September 20th made it clear that crushing inflation (or "price stability" as the Fed calls it) is still job one.

"The worst thing we can do is to fail to restore price stability," Powell told reporters, "because the record is clear on that; If you don't restore price stability, inflation comes back," he said, noting that protracted episodes of inflation returning not only affects growth but hurts "all kinds of other things" too..

"It can be a miserable period to have inflation constantly coming back and the Fed coming in and having to tighten again and again," Powell added of his plans to see the inflation fight through to the end. "So the best thing we can do for everyone, we believe, is to restore price stability."

Not Just Down, But Completely Dead

In other words, Powell & Co have made it clear that they are going to see their inflation fight through to the end. Not close to the end, but until it is entirely done and dead. To many market watchers, that means get ready for another hike, and maybe even one more after that, before year's end.

"I think people are a little bit surprised, perhaps, that we have an easing in asset prices, but the Fed is not moving," Max Boonen, a former fixed income trader for Goldman Sachs turned founder of blockchain bond shop PV01 told Kitco News correspondent Matt Nesto in an interview at the Messari Mainnet Summit in New York. (see video above)

As Boonen sees it, further tightening "makes perfect sense" since the bubble the Fed created over the past 10 years was the result of asset price inflation, but the Fed was -- and is -- looking beyond that and only considering the price of goods and services.

"I think it stands to reason that the Fed is not going to stop just because asset prices (home prices, investments) are going down," Boonen added. "We used to talk of ‘the Greenspan Put', and maybe that was just a Greenspan thing but it doesn't mean that future governors have to play by the same rules."

So, while traders and asset managers may lament the pain being inflicted by higher rates, and disagree with Powell's policy, Boonen argues that six month's of being wrong is a good time to revisit the "don't fight the Fed" adage and listen to what's being said.

"In my personal view the market has been wrong for so long in expecting rate cuts (and) that there would be a negative turn to growth and that the Fed would change tack," Boonen told Kitco, before noting that that has not been the case. (see video above)

"Oftentimes the markets are more right than the central bankers but this time around, clearly the market has been wrong footed," he added.

Meeting of the Minds

Officially, the Fed's Open Market Committee has two more scheduled meetings this year, the next one on October 31st and Nov 1, and then again on December 12-13.

To be sure, Boonen is not alone in his hawkish near term take on the Fed, as Kitco contributor and The Gold Forecast publisher Gary Wagner explained in a post-meeting commentary.

"Anticipating stronger-than-expected economic growth the Federal Reserve upwardly revised its projection on GDP and now anticipates that the economy will rise by 2.1%," Wagner wrote, noting that the Fed would continue its hawkish monetary policy and was also now "projecting only 2 rate cuts in 2024 which is 2 fewer than were indicated in the June economic projections," he added.

For now, Boonen says he's keeping a close eye on the real estate market for signs of stress.

"One of the big uncertainties, in my opinion, is that the impact of higher rates hasn't seeped through entirely into the housing market," Boonen told Nesto, adding that he feels further weakening of prices is likely, followed by a consumer confidence hit under the guises of "the wealth effect".

"To me a lot of the uncertainty circles around the fact that we don't know yet the extent of the wealth effect on consumer spending," he said. "When you start to understand that your house is worth a lot less than it used to, how does that affect your spending decision?," Boonen said before questioning the impact it could have in terms of consumer spending and overall growth.