It has become fashionable among the financial punditry to embrace ultra-hawkishness on monetary policy. They wag a reproachful finger at the Federal Reserve for the supposedly imprudent dovishness it has deployed in the past.

These monetary scolds insist that excessive Fed stimulus has stoked inflation. Now, we must all buck up and swallow sharply higher rates, like recalcitrant children taking our cod liver oil.

This school of thought seems to forget that during the darkest days of the coronavirus-induced crash in 2020, it was largely the Fed’s emergency monetary easing that staved off a full-blown economic depression (that’s depression with a “d”). Yes, now that the pandemic has eased and the economy is back on its feet, it’s prudent for the Fed to rebalance.

However, as I wrote in my Mind Over Market’s column last Friday, the inflation that the Fed is fighting is mostly the result of supply chain woes and scarcities caused by the pandemic and the war in Eastern Europe.

Interest rate policy can do nothing to address rising energy prices because of disrupted oil and gas supplies from Russia, or rising food prices because of disrupted grain supplies from Ukraine. The Fed could be excessively hobbling an already struggling economic recovery.

Among the dumbest arguments I hear on the Sunday cable news gabfests is that green energy policies are responsible for higher fuel prices and in turn inflation.

Inflation is undeniably running hot, and high inflation is a scourge for consumers and investors. The betting on Wall Street is that the Fed this month will announce another 75 basis point hike in the federal funds rate. It already hiked rates by that amount last month, the biggest hike in 28 years.

The Fed forecasts the fed funds rate will end 2022 at a range of 3.25% to 3.5% and next year at about 4%, according to their median estimate.

Is the Fed going too far, or not far enough? Even the Fed admits that it’s front-loading higher rates, to give it more wriggle room down the road if inflation moderates.

History shows that the Fed rarely gets it just right, in pursuit of its dual mandate. We’ll get a better idea of the efficacy of current Fed policy, as new economic data arrive.

This week, keep a close watch on the latest releases of the consumer price index (Wednesday) and the producer price index (Thursday). Brace yourself for volatile stock market reactions, whether the data show that inflation is cooling or not.

In the meantime, the mood on Wall Street has brightened a bit, with the major overseas and U.S. equity indices posting a positive holiday-shortened week. Investors concluded that certain sectors, such as technology, had been overly punished and they sought value (see table).

The equity markets might be stabilizing. That said, recession looms as a very real threat. U.S. gross domestic product (GDP) growth was negative in the first quarter of 2022; if we get another negative reading for Q2, we’re officially in a recession.

Since World War II, the U.S. has witnessed 12 official recessions, an average of one about every six and a half years. Recessions have lasted an average of 10 months, although they’ve varied in their intensity.

Economic growth and consumer confidence are slipping; analysts are revising their projections lower for 2022 GDP growth.

Now the good news. Recent surveys indicate improvement in supplier delivery times. Supply chain bottlenecks are getting solved. Inflation is showing signs of peaking and corporate earnings growth remains decent. And last Friday, we got a solid jobs report.

With consumer spending accounting for 70% of the economy, there is a direct link between the labor market and the magnitude of any economic downturn. The headline unemployment rate hovers at 3.6%, which means a recession (if we get one) is likely to be shallow.

Key factors moving forward will be the degree to which inflation is moderating and how the Fed responds. Corporate profit margins also figure prominently. As input costs rise, bottom lines are getting squeezed. Many companies have successfully wielded pricing power to combat inflation; this ability will get sorely tested.

Your next growth opportunities…

Stock markets are forward looking and year to date, investors have been pricing in an economic outlook that (in my view) is too dour. That spells opportunity.

Under the risky and volatile conditions I’ve described above, where can you still find solid growth opportunities? We can sum it up with a single word: takeovers. You might have heard them referred to as buyouts, mergers, or acquisitions. But no matter what you call them, when a takeover is triggered, the profits that spill out have life-changing potential.

In this era of war, inflation and pandemic, corporate consolidation is the name of the game. Even the whisper of a “mega-merger” can hand investors enormous returns. My colleague Nathan Slaughter, chief investment strategist of Takeover Trader, just pinpointed a potential takeover deal that could dwarf them all.

Want to get in on Nathan’s next big trade? Click here for details.

John Persinos is the editorial director of Investing Daily.

Got any questions, comments or suggestions? Send John an email: mailbag@investingdaily.com.

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