A few years ago I did a military-type event called the “GoRuck Challenge.”

It began at 7:30 PM, and for 13 hours I, along with 11 other masochists, learned what it means to “embrace the suck.”

Speaking of embracing the suck, that’s me below on the business end of a log we pulled out of a gulley at 2:30 a.m. that night.

The cadre leading us were ex-Special Forces guys. Apart from making sure we stayed hydrated, they showed little concern about our suffering, knowing firsthand how far the human body and mind can be pushed.

It was tough. And, yes, I paid for the experience.

As the night wore on and our spirits sank, they reminded us of the 3 Rules:

1. Always look cool
2. Always know where you are
3. If you get lost, refer to rule #1

And as the Fed finds itself on the business end of a massive pivot in market sentiment, Jerome Powell knows that the last thing he wants to do is ignore Rule #1.

The Control Perception

Rate hikes have finally begun to bite.

The Federal Reserve’s most aggressive tightening campaign in history ended last August with a cumulative rise in overnight interest rates of 525 basis points.

Had the AI boom not been there to light a fire under the market’s animal spirits, the inevitable correction would have begun months ago.

Now it’s on.

The S&P 500 has retreated 7% off the highs it set two weeks ago. The NASDAQ is down 10%.

And expectations for the Fed to bail out markets with rate cuts have soared.

One month ago, the market priced in a meager 25 basis point cut by the last Fed meeting on December 18.

It now expects a total of 125 basis point cuts, with some expecting an emergency rate cut before the next meeting in September.

Source: CME FedWatch

Now, I view the possibility of an emergency cut as an overblown fear.

The optics would be terrible for markets. Doing so would spark more selling, signaling that the Fed fears it’s behind the curve—which the Fed will do anything to avoid.

It will maintain the perception of control as long as possible, and a panicky rate cut will destroy that perception.

I’m not a fan of the Fed. The price of money should be determined by the market, just like everything else. The Fed’s fiddling with that price through interest rate manipulation creates more problems than it solves.

But what I think about the Fed doesn’t matter. They are a fact of life. And rather than pounding sand and wailing about a better way, the best I can do is understand their motivations.

The Fed will cut. They’ve been itching for an excuse to do so since they began hiking in March 2002. The current sell-off, alongside signs of a weakening economy and job market, gives them the pretext they need to cut.

Plus, they know that they need to get ahead of the next big shoe to drop—the collapse in commercial real estate.

Truth is, the Fed can never know what the price of money should be.

They are always lost.

Which is why the only rule for the Federal Reserve is Rule #1.

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Think Free. Be Free.

Don Yocham, CFA

Managing Editor of The Capital List