Below is a chart and brief excerpt from today’s Market Situation Report written by Tier 1 Alpha. If you’re interested in learning more about the Hedgeye-Tier 1 Alpha partnership, there’s more information here.

The Federal Reserve's strategy of managing the economy by modulating bank lending has seen diminished effectiveness in the 2020s compared to the 1970s. Previously, influencing lending rates directly impacted money creation, serving as a tool to stimulate the economy or control inflation. Now, fiscal deficits, largely driven by legislative spending on programs like Medicare, Social Security and Defense, play a greater role in money creation and are minimally influenced by the Fed's interest rate decisions. This marks a significant shift, indicating that the Fed's traditional monetary policy tools have less sway over the economy's broader fiscal dynamics.

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The challenge is compounded by the high level of federal debt, altering the impact of interest rate adjustments. Lyn Alden has pointed out that increasing rates now boost government interest expenses, leading to larger fiscal deficits and inadvertently stimulating the economy. This pro-cyclical effect contrasts with earlier times when raising rates effectively curbed bank lending without significantly impacting federal expenses. The situation illustrates the reduced effectiveness of the Fed's monetary control in environments of high public debt, where its actions can unintentionally fuel a debt-interest spiral.

For investors, this fiscal-dominated landscape suggests a divergence in sector performance. Interest-sensitive sectors like commercial real estate face challenges under tight monetary conditions, while sectors less affected by interest rates, benefiting from fiscal spending — such as technology, healthcare and consumer discretionary — show resilience and growth potential. This fiscal and monetary policy divergence highlights the evolving dynamics of economic management and sectoral investment opportunities.

More recently, in the very short term, we are seeing the improvement in economic data manifest as a bid for the Russell but not at the expense of mega tech.

Learn more about the Market Situation Report written by Tier 1 Alpha.


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