General / Video Commentary

Fisher Investments Founder, Ken Fisher, Explains Why Fed Chatter Doesn’t Matter

Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher explains why investors are likely better served by tuning out Fed chatter. While interest rate hike forecasts may invoke fears of a hard economic landing, Ken says it is nearly impossible to predict future Fed decisions—especially since Fed decision makers change their minds regularly and tend to be more reactive than proactive.

Ken believes investors should focus on whether bank lending is increasing or decreasing rather than what the Fed is doing at their FOMC meetings. While interest rate hikes can blunt demand for new loans, Ken says that’s only one side of the equation. Modestly higher rates can mean bigger profits for banks—a strong incentive to increase the supply of new loans. Robust loan growth speaks more to the health of the economy than the rate of those loans. As rates climbed last year, lending remained exceptionally robust. Ken says people don’t get loans to sit on the money—if banks are lending, consumers and businesses are spending, keeping the economy moving.

Transcript

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Title screen appears, “Fisher Investments Founder, Ken Fisher, Explains Why Fed Chatter Doesn’t Matter”

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A man appears on the screen wearing a navy suit, sitting in an office in front of a fireplace.

He begins to speak.

A banner identifies him as Ken Fisher, Executive Chairman and Co-Chief Investment Officer, Fisher Investments.

Ken Fisher doing hand gestures time to time explaining.

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Ken Fisher: Let me just be real clear about this because people don't get it. And this is more true now than normal. But the reality is that the Fed is almost always not very inventive, not really forward thinking, but consensus thinkers.

They tend to think mostly what everybody else kind of already thinks with a whole lot of jargon.

And they're more political than they

want you to think they are.

Let me make the point really simply to see that all you have to do is look at 2022.

Ken Fisher: As the year started, they were saying, as you may recall, inflation is transitory.

Now, right or wrong, all kind

of people make wrong forecasts.

So that they make wrong forecasts

isn't necessarily condemnatory, at all.

In May, they said, Powell said, Chairman, we're not even considering 75 basis point rate hikes.

Not even considering the next month they did 75 basis points.

And in the next four meetings in a

row they did 75 basis points each.

Ken Fisher: So, what I'm going to say to you is that it is and has always been largely true.

They themselves don't know what they will do.

They themselves don't know what they will think a few months from now.

What will it be? Well, I don't know.

If they don't know, how am I going

to know what they're going to think?

But it is less important now than normally it's been.

Because traditionally most of history, not all of history, when the Fed hiked overnight bank reserve rates, federal funds rate, that raised the bank's cost of borrowing money.

And since banks are in the business of taking in short-term money as the basis for making longer-term loans to finance those longer-term loans,

that reduced the profit margin on lending, which reduced the amount of lending, because if it's less profitable, why does bank want to do it?

And then from that, said simply, when the banks start pulling in their loans and reducing their outstanding loans, that would cause economic contraction.

When you have been borrowing from the bank and they say, give me back my bullets, and you give them

back their bullets, you don't have the money to do the things you were going to do before.

Finance inventory, finance growth, whatever it is.

Ken Fisher: Typically that leads to recessionary features, which is what everyone's been talking about. This time, unlike most times, because the banks are so overloaded with near zero cost deposits, the spread

between that and long rates hasn't really gone up, hardly at all, as the Fed has raised rates.

And so, lending has remained exceptionally robust.

Rather than focus on what's the Fed doing at their FOMC meeting, look online monthly to see how much loan growth is increasing or decreasing, because it's loan growth that really matters, not the interest rate.

We get confused by this because we

assume that if interest rates are going up, that's really got to kill things.

But it's really how much bank lending that goes on that does or doesn't kill things, not the interest rate.

We think about that because we

think of ourselves as borrowers.

Ken Fisher: But in reality, it's important to think of demand and supply.

And in an environment where loans are going up aggressively because banks are making more money

on loans and pushing the loans out, you need to see that somebody's borrowing that money.

And they're not borrowing the money to sit on it, to borrow the money, to spend it, one way or the other.

And that isn't contractionary or recessionary.

Thank you for listening to me.

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Other Male Voice: Subscribe to the Fisher Investments YouTube channel if you like what you've seen. Click the bell to be notified as soon as we publish new videos.

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A series of disclosures appears on screen: “Investing is Securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations. The foregoing constitutes the general views of Fisher Investments and should not be regarded as personalized investment advice or a reflection of the performance of Fisher Investments or its clients. Nothing herein is intended to be a recommendation or a forecast of market conditions. Rather it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. Not all past forecasts were, nor future forecasts may be, as accurate as those predicted herein.

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