Why your plan this New Year should be to ignore Fed rate moves

Federal Reserve chairman Jerome Powell anticipates the banking regulator will issue fewer cuts this year. AP

Will the Fed keep cutting rates in 2025? Or will resurgent inflation force renewed hikes? Will UK and eurozone cuts prove too little, too late? Will more Bank of Japan hikes derail its gross domestic product bounce?

Anyone telling you what central banks will do is a liar or fool. You can’t know, ever. The good news? You don’t need to. Central banks’ power is hugely overrated. Cut, hike or hold, their actions rarely mean much. Sound heretical? Hear me out.

Two years ago, I showed you why central banks aren’t predictable. While their sterling resumes and pseudointellectual wisdom make the masses quiver, central bankers are, well, just people. People who say one thing and do another, change their minds, make mistakes and are overly convention bound. Their forecasts of their own actions are better at predicting what won’t happen than what will.

The European Central Bank (ECB) openly predicted no 2022 hikes but raised rates 50 basis points that July – then three more times. And six more in 2023. The Bank of England flip-flopped twice this cycle. They all flip-flop – often and always have. Hanging on every word is time misspent.

So is presuming wisdom drives their actions. Take wages. Fed folks deem wage growth inflationary. But US economist and statistician Milton Friedman proved five decades ago that rising wages always follow inflation – never cause it. We just lived it.

US inflation started spiking in February 2021 towards a 9.1 per cent peak rate, while wages fell. Later, wage growth began accelerating in May to a 5.9 per cent mid-2022 peak, while the inflation rate plummeted (to 2.7 per cent now). Then, wage growth slowed to 3.9 per cent. Inflation moves first; wages later – always. That holds globally, too, as inflation’s slowing came while UK and eurozone wages surged. Central banks never learn.

Nor do most investors, who keep insisting rate moves directionally drive economies and markets. History shows repeatedly that hikes and cuts swirl swiftly to background noise.

Yes, 2022’s already existing global stock bear market worsened as central banks hiked rates. But if rate hikes caused it, why did a rip-roaring rally start that October and soar as even more and bigger rate hikes rolled in?

Consider how the fear of hikes, not the hikes themselves, drove 2022’s slide. The S&P 500 gained 70.9 per cent since that October’s low – preceding six straight rate hikes. Stocks boomed in 2024, while early rapid rate cut expectations imploded.

The ECB hiked starting in July 2022. By its first cut this June, eurozone stocks were 38 per cent above pre-hike levels. The Bank of England hiked 14 times from December 2021 until this August’s cut. UK stocks rose 24 per cent in pounds over that stretch. With hikes like those, who needs cuts?

Consider: If cuts were massively bullish, European stocks should be partying, while Japanese stocks would be crying in the corner. Instead, eurozone stocks are down 1.1 per cent since June’s initial cut. The ECB cut four times through December, but the bloc’s stocks kept stumbling sideways. No monster rally. No swift economic data improvement as recession fears rage, while German GDP limps.

UK stocks are down 1.9 per cent since August’s first rate cut. Neither it nor November’s second cut was some massively bullish catalyst. Yes, monetary policy moves may hit the economy at a lag. But were there massive juice here, stocks would pre-price it. They aren’t.

Then consider Japan – the exception proving the rule. While western banks cut in 2024, Japan hiked for the first time in over a decade. Since July’s hike, the MSCI Japan index actually rose while Europe fell.

Markets spent all of 2024 showing you rate moves are just one small variable. They paled beside the larger trends driving markets. Solid growth, burgeoning tech demand and Trumpian fear fading – drove stellar US returns.

Falling luxury goods spending and economic jitters weighed on eurozone stocks despite rate cuts. Sector concentrations mattered more in Britain, too, where commodity-orientated stocks’ headwinds hurt.

Think longer term. Many claim now is like the late 1990s tech bubble. If so, note 10-year US Treasury rates rose all through 1999 from 4.6 per cent to 6.5 per cent, all higher than now, while the S&P 500 gained 20.1 per cent.

Meanwhile, the Fed Funds rate rose from 4.1 per cent to 5.3 per cent. Then, before the “bubble” burst, the Fed was already cutting rates and continued that entire bear market – all the way down to 1.3 per cent. Ignore their gyrations. They simply aren’t what moves stocks.

Successful investing requires looking where others don’t. While the world focuses on central banks’ sideshow, your time is better spent seeking whatever the masses overlook. Next month, I’ll show you that with my 2025 forecast. Happy New Year.