Recorded the evening of the Fed’s decision, with Jim calling in from the New Orleans Investment Conference, episode 168 of Traders Edge brings back First Trust economist Bob Stein to make sense of the Fed, inflation, the economy and the midterm elections. The Fed held rates, with dissents. The hosts are frustrated that a press-conference question was spent on politics rather than inflation, and Stein agrees reporters waste questions on “gotchas.” On substance, he explains why the Fed is still adding to its balance sheet even with inflation above target: because it pays banks interest on reserves, the banking system wants more reserves, so policy looks less tight than it otherwise would. He watches M2 money supply, which is growing about 6% a year, back to the pre-COVID trend. On inflation, Stein says most of the increase compared with a year ago comes from energy, including Middle East disruptions and damaged Russian refineries. Excluding energy, CPI is near its lowest in five or six years. Once energy prices stop rising year over year, he expects overall CPI around 2.5–2.6% in six or seven months. Even so, he sees a December hike as “baked in,” with any further hikes at best 50/50. His view of the Fed’s politics: Kevin Warsh is chairman, but the Board of Governors and regional presidents still lean toward Jerome Powell’s approach, so the two have to work around each other. On markets, Jim says he bought long-dated Treasuries near 5.3% on the 10-year; Stein expects the 10-year to average about 5–5.25% over the next year and would buy above that. He thinks stocks are overvalued and sees more room for small caps than mega caps. Bob Iaccino is still cautiously bullish heading into the strongest season for stocks, and highlights the equal-weight S&P 500 as a healthier-looking trend than the cap-weighted index. During the show, Google falls about 8% after earnings while Microsoft rises on strong Azure growth. How much of the economy is AI? Stein estimates about 40% of current growth is tied to AI and data-center building; without it, growth would be about 1.5% rather than 2.5%. He expects third-quarter GDP around 3.3% and solid, if not spectacular, growth next year, while an aging population keeps pulling labor force participation down. His midterm forecast: little effect on the economy, but if Democrats take the House, expect repeated government shutdowns, and eventually a fight over the president’s power to impound funds that he thinks the Supreme Court could decide in the president’s favour around 2028. Key takeaways: – Interest on reserves and continued balance-sheet growth complicate the Fed’s message. – Energy drives most of today’s excess inflation; Stein sees CPI near 2.5% by mid-2027. – About 40% of current growth may be tied to AI and data centers. – Equal-weight and small-cap exposure may offer better balance than mega caps. This episode is educational and not investment advice. |
