When Will the Fed Stop Raising Rates?

In a recent memo by Howard Marks, he shared a summary of conversations he had when the Fed began raising rates for the first time following the Great Financial Crisis:

"In late 2015, virtually the only question I got was "When will the first rate increase occur?" My answer was always the same: "Why do you care? If I say 'February,' what will you do? And if I later change my mind and say 'May,' what will you do differently?

If everyone knows rates are about to rise, what difference does it make which month the process starts?"

No one ever offered a convincing answer. Investors probably think asking such questions is part of behaving professionally, but I doubt they could explain why."

We're on the opposite end of this conversation today as we may be (possibly, hopefully) nearing the end of this rate-raising cycle.

Given the Fed's prominent role in the markets, it's not surprising that a top question posed to me and every advisor I know is, "When will the Fed finally stop raising rates?"

I think Mr. Marks' conversation template can be helpful here:

If we knew the Fed would be done raising rates by February, what would we do? If instead, it was May, what would we do differently?

What if we knew the Fed would raise rates by just two more percent, how might we respond? Would investors consider this to be a victory or a sign of more pain to come? Would that tip us into a recession, or would knowing this offer a reprieve, given that the end is in sight?

What if they raise rates by 3% more? Or 4%? What if it's just 1% more? Or what if, by February, the Fed starts dropping rates again, as some academics are now suggesting is possible?

As you consider these questions and the broad nature of the possibilities, I think it's somewhat obvious that these questions are impossible to answer with any level of certainty.

If that bothers you, think about this: the Fed doesn't even know what the Fed is going to do.

Surely, we could come up with some educated opinions for what might happen in each of these cases, but we'd have to ask ourselves whether these opinions would do us any good. It seems doubtful at best.

One thing we know about most forecasting (guessing) is that the probability of being wrong is high, and the costs for being wrong are potentially permanent.

That doesn’t seem like a risk worth taking.

As long-term investors, we aren't seekers of opinion. We are seekers of wisdom. And just like most wisdom, it's usually not a medicine that tastes very good.

That is, waiting it out continues to be our best option even if that means it’s uncomfortable. All of history has shown that these short-term uncertainties have a way of working themselves out in the end, so it’s reasonable to think that it will be the same with this one as well.