Expect Fed Inflation Fight To Continue Through 2023


Simpler Trading Team

Sep 22nd 2022  .  4 min read

The market continued its struggles in the aftermath of the central bank benchmark interest rate hike.

The stock market opened flat Thursday morning, and pushed deeper into the red, led by the technology-laden Nasdaq.

More pain is ahead, according to Federal Reserve (Fed) Chairman Jerome Powell, and that pain will be felt in the pocketbooks of consumers and traders.

Fed inflation fight won’t end soon

Raising interest rates not only affects stock market securities (like treasury bonds where yields are rising) or companies tied to international currency rates (like market-favorite technology stocks), the hikes hit consumers managing credit card debt or trying to buy homes or cars.

Retail traders must navigate the stock market volatility caused by higher interest rates. Every trade decision in some way is influenced by this broad stroke of Fed monetary policy.

And don’t expect this outside influence to end anytime soon.

The Federal Open Market Committee (FOMC) is determined to bring down 40-year high inflation with more interest rate hikes – no matter how long it takes.

Powell no longer holds to his previous notion of a “soft landing.”

“Inflation is really hurting,” Powell said after the Wednesday rate hike, acknowledging that the American consumer is hurting financially. “It would be nice if there was a way to wish away inflation, but there isn’t.

“This is very painful for people at the lower level of the income spectrum,” Powell said. “People are seeing their wage increases eaten up by inflation.”

He said the FOMC goal is to get supply and demand – contributors to inflation – back in line by slowing the economy.

“We have got to get inflation behind us,” Powell said. “I wish there were a painless way to do that, there isn’t. We need to get rates up to the point where we’re putting meaningful downward pressure on inflation. We need to complete this task.”

After its .75% (75 basis points) rate hike yesterday, the Fed anticipates raising interest rates further through 2023, to a level as high as 4.6%. The latest hike raised the target range for the federal funds rate for the fifth time this year, bringing the target range to 3% to 3.25%.

Stock moving averages present options

Simpler’s traders are working hard to identify potential trades after the Fed rate hike battered the stock market this week.

To buy or sell, those concerns have a more nuanced meaning in this market volatility.

“There may not be a lot of reasons to be focusing on anything to buy for a few sessions,” said Henry Gambell, Senior Managing Director of Options Trading at Simpler Trading. “Based off the way the S&P 500 closed (Wednesday), we very well could see some additional downside.”

He remains cautious against leaning too strongly into short plays as the market continues sliding downward as it digests the Fed rate hikes.

“I think that’s a hard thing to be chasing at these levels,” Henry said.

At some point, and no one knows exactly when, there will be a bounce higher. Henry is watching key stocks that might offer opportunity on a bounce.

He is watching the moving averages of these stocks, specifically stocks where the 8-day exponential moving average (EMA) is trading above their 21-day EMA.

“Having the faster moving average above the slower is one of the most basic ways to define the trend of a product,” Henry said, while reviewing the Netflix (NFLX) daily stock chart. “With that moving average relationship, and with the squeeze that is moving higher, I believe that pullbacks into the 21 EMA will be the first spot to be looking for buy side opportunities.”

Other stocks Henry is watching that are showing similar chart patterns are Enphase Energy, Inc. (ENPH) and Tesla, Inc. (TSLA).

Henry sees potential in these stocks when the squeeze fully resolves, likely showing a directional move. He encouraged traders to adjust chart time frames, i.e. switch to the 2-day chart, to get a broader view of this pattern.

“This gives a few names to consider if and when we find a spot to bounce,” Henry said.

Traders should consider all risks associated with these patterns or any trading setups, and be prepared for wins or losses.