Moneybeat: Rising interest rates and signs of inflation

MARY REICHARD, HOST: Next up on The World and Everything in It: the Monday Moneybeat.

NICK EICHER, HOST: Time now for our weekly conversation on business, markets, and the economy with financial analyst and adviser David Bahnsen, head of the wealth management firm The Bahnsen Group. Good morning!

DAVID BAHNSEN, GUEST: Good morning, Nick, good to be with you.

EICHER: Well, everyone saw it coming, the Federal Reserve last week increased its target interest rate— the so-called fed-funds rate—raising it 75 bps, three-quarters of a percentage point after doing the same in June and July.

And again, not a surprise. But was there anything about the Fed’s rate hike that was noteworthy to you?

BAHNSEN: I suppose a quick comment just on the only thing that was somewhat of a difference, we knew they were raising three quarters of a point, it's the third in a row doing that. Remember, they had also done half a point and a quarter point in the two meetings before that. So you basically now have 3%, as the fed funds target, up to three and a quarter, there's a range. And so they will likely get closer to 4% by the end of the year. And the Fed set their expectations. And their predictions, what they call the dot plot, where they're forecasting their rate will end up being at 4.4. And then they set their dotplot for the end of next year at 4.6. So basically, they're kind of assuming that they're not going to be changing rates, they won't be continuing to hike rates next year, once they get up to that level, nor are they forecasting that they'd be cutting it.

Now the first comment that I made in Dividend Cafe last week that I want to reiterate, there's been no worse predictor of interest rates in my lifetime than the Fed’s own predictions of what they're going to do. Their dot plot has so imperfectly tracked with what has actually ended up happening that it's been comical. And yet, I just want to point out the current state of Fed expectation, they see themselves going another point in the quarter, and then basically stopping.

EICHER: David, talk about the market reaction to the Fed’s move.

BAHNSEN: I think that the biggest news over the last week was with the really significant downward pressure in the stock market. And massive upward pressure in bond yields, that you basically have a market right now that on one hand is pricing in a recession they think will come because of Fed policy, and the stock market side, and then a bond market pricing and a lot of what is happening in the Fed policy. And it's setting us up for the mother of all reverses in the bond market because you can't have bond yields going higher when you go into a recession. In a recession, it prices in much less growth, negative growth, and in fact, a flight to safety, which pushes bond prices higher and yields lower. And so there's just significant drama forming in capital markets. And it's gonna be quite interesting to see how some of these tales play out in the months to come.

EICHER: Okay, well, speaking of drama, let's turn to the biggest drama in Washington, DC, public policy. Senator Joe Manchin released the details of his energy bill on permitting. This was Manchin collecting on the deal he made in exchange for his crucial support back in August for the big spending legislation variously referred to as the Inflation Reduction Act or the Climate bill as it’s also known.

He extracted a promise from his fellow Democrats for a vote on a bill he wanted and of course Manchin is pro-fossil fuel as he’s from West Virginia. But last week, we got details of his legislation. What did you think of it?

BAHNSEN: Well, basically, the bill on its own, I generally like. I just don't like what the quid pro quo was to get there. Now, I don't think that the bill does nearly as much as I would like it to do I think that there ought to be a significantly more aggressive posture towards approving and permitting both pipeline projects and drilling allowances on federal land, removing some of the really silly state regulatory objections to keep some of these approvals from happening is I think, a good step. And what they do was they basically in this bill, when the federal regulators have said there's no water problems with a particular project that say the states are not allowed to come back and act as if there is. And what he's doing there is pointing out, well, we've all known for a long time, is that state agencies are circumventing law by making up concerns about water, where even the federal regulators and environmental authorities have said there isn't a water concern. So there's things like that, that it does that I like, but it doesn't go far enough. And I don't like the price he had to pay to get it. And then we'll see if they're able to get it through because their plan right now is to attach it to the bill to fund government. And that's daring some of these Democrat progressives who are against it to vote against it. And they may very well do so thinking that the blame for shutting down government would not go on them. And then they could make a motion to have just a standalone bill for funding government. And then they dare Manchin to block that. So there's real political gamesmanship going on within the Democrat Party, and there is a better than 50/50 chance that Senator Manchin gets really played here. This is going to be quite a soap opera to watch.

EICHER: Alright, listener question from a voice I think you will recognize.

BASHAM: Hey, Nick and David, this is your old colleague Megan Basham! Long-time listener, first-time caller. I saw this story and immediately thought, I really need to get David’s take on this one. Here’s what it was: JP Morgan Chase CEO Jamie Dimon said a few days ago that submitting to Congresswoman Rashida Tlaib’s ESG agenda would be “the road to hell for America.” Is this true? And if so, why is it true?

EICHER: Great to hear Megan—and just a quick point of clarification, the “ESG agenda,” that means “environmental, social, and governance” principles to bring the corporate world into line with progressive social values, anti-fossil fuels for example. So, go ahead, David.

BAHNSEN: Well, I love the question, Megan. And I certainly loved that clip with Jamie Dimon and the congresswoman. And specifically what she said is, “Will your bank commit to not providing any further funding to any fossil fuel right away?” And so Jamie is an advocate of net zero emissions by 2050. And I'm not and I don't agree with him on that yet, he's pointing out the absurdity of the extreme position, that you can have no output from fossil whatsoever, or that bank somehow are supposed to practice the art of censorship of such projects. Blocking any financing of new production with natural gas is a way to make people freeze to death. And Jamie knows it, and all grownups know it, and the congresswoman should be ashamed of herself, not only for the ridiculous position she holds, but that incredibly inappropriate framing of the question to their banking executive guests. I think that fundamentally highlights the problem we have right now with ESG is it's an ideological movement, not an environmental one. And it is asking other people to take the sacrifice; it’s asking other people to have less power, less warmth, less production. And we've seen how that's worked out with a Europe it's made them really mercilessly at the control of an unfriendly power with Putin and Russia. And the notion that Congresswoman Tlaib want us going down this path is insane. And I commend the CEO of JP Morgan, Jamie Dimon for standing up to her and saying so.

EICHER: You can submit your question for the Moneybeat Mailbag, feedback@worldandeverything.com. We do plan to keep making time for questions and I wanted to use Megan’s question because it was so timely. But you can ask anything that’s on your mind around business, economics, and finance. The Moneybeat Mailbag at feedback@worldandeverything.com.

David Bahnsen is founder, managing partner, and chief investment officer of The Bahnsen Group. His personal website is Bahnsen.com.

David, talk to you next time. Thanks!

BAHNSEN: Thanks so much, Nick.

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