Fair warning before we begin today’s issue. It’s going to be a little on the dry side. That’s because in addition to a few economic data points to sift through, the Federal Reserve just concluded its December policy meeting and signaled some big changes for next year.

But I’ve decided to include a little reward for sticking through to the end of today’s issue. And if you like the idea of a free trading idea that could reward you with some extra income, then you’re going to love it.

More on that in a second. But first, let’s dig through the data and talk about the Fed’s latest moves…

---

The PPI Turns Red-Hot

Yesterday, the Bureau of Labor Statistics announced that the Producer Price Index (PPI) surged 9.6% for the 12-months ended in November. It’s the largest increase since data was first calculated in November 2010.

Remember, unlike the Consumer Price Index (CPI), which reflects what consumers actually pay, the PPI measures a basket of input costs for businesses. Since producer can only shoulder higher costs for so long, it’s generally thought that businesses will eventually pass these costs on to consumers – meaning at least some of it will show up in the CPI.

Analysts expected a big rise (9.2% in fact), and the latest reading blew past that. It also continues a troubling trend… last month’s reading was revised upwardly to 8.8%.

So in case there’s any doubt, we’re headed in the wrong direction.

_{Source: Bureau of Labor Statistics}

Again, last week, we learned that the CPI rose by 6.8% on a year-over-year basis. And if these latest PPI readings are any indication, investors are right to be concerned about inflation continuing to run hot.

That was enough to send markets lower yesterday, despite encouraging news about the new Omicron variant of Covid. A study out of South Africa reportedly showed that just two doses of the Pfizer vaccine were 70% effective against hospitalizations. And in related news, the company also announced that its pill for treating Covid was 89% effective in preventing hospitalizations.

---

The Fed Gets Serious About Inflation (And Future Rate Hikes)

Meanwhile, today all eyes in the market were turned to the conclusion of the Federal Reserve’s policy meeting.

I’ll get right to the important stuff.

The Fed announced that it will further accelerate tapering its bond-purchasing program and forecasts as many as three interest rate hikes next year.

Starting in January, the Fed will reduce the pace of its purchases to $60 billion per month, compared to the projected $90 billion in December, and $120 billion in November. So we’re essentially looking at half the level of purchases in just a few short months.

The Fed expects the taper to be wrapped up by early spring, by which time we can expect the central bank to begin raising interest rates.

The Fed’s “dot plot”, which surveys the committee’s voting members, revealed that we could see as many as three hikes next year, followed by two more in 2023.

_{Source: Federal Reserve Board}

The chart above shows the midpoint projection for each member’s judgment for the appropriate federal funds rate over various time periods. It shows that 10 of the 18 members see rates higher by 0.75% in 2023. Two see rates even higher, while only six forecast one or two rate hikes next year.

The bottom line here is that the Fed will likely hike rates one more time than most expected a few months ago. Frankly, this is welcome news — and the market seems to agree. It means the Fed is taking the situation seriously, but doesn’t want to overcompensate for past missteps (my opinion) by swinging too far in the other direction.

They’ll likely have a tough fight ahead. Not only will they have inflation to worry about, but they’ll also have Congress and the Biden administration working against them, so to speak. My colleague Amber Hestla touched on the divide between the Fed and the rest of Washington in her latest comments to subscribers:

The Federal Reserve is one of the most secretive organizations in the U.S. government. We rarely know what senior officials discuss in their meetings, but as they gather in Washington this week, we can be fairly certain they are focused on inflation.

If the Fed doesn’t get inflation under control quickly, the economy and the stock market will struggle. Fed Chair Powell and other policymakers understand this, but they must be questioning whether they have the right tools. If they do have the tools they need, these Washington insiders need to question whether they have the political backing to fight inflation.

Congress and President Biden want to spend money. They have noble goals for trillions of dollars in new programs and a strong desire to pass a law that funds at least some of those goals. But noted economists, including former Clinton and Obama administration veteran Larry Summers, warn that those plans are inflationary.

The threat of inflation doesn’t mean Congress won’t pass a big spending bill. It just means the Fed’s job is more difficult and may require the Fed to take bold and unpopular actions.

As Amber went on to explain, this means that the risks are somewhat high now, as we don’t know exactly how the market will respond to future interest rate hikes. On the one hand, investors may think the prospect of three interest rate hikes is sensible. On the other, well… what’s the old saying about taking away the punch bowl at the party?

We’ll keep tabs on this as the situation unfolds. Stay tuned.

---

A Trade You Can Make For Extra Income

If you’re looking to mitigate your risk in the market while still pocketing some income, then you’re in luck today.

Many of you know that we’re a fan of selling put options. It’s one of the easiest ways to reduce the capital you risk while also earning extra income.

And today, we’re going to share a trading idea with you, courtesy of Amber.

If you know how this works, then you can use this trade to start earning more right away. And if you don’t, then at least you’ll have an example to see what’s possible.

To recap, put options give investors the right — but not the obligation — to sell a stock at a specified price before a specified date. Selling a put obligates us to purchase that stock from the put buyer if it falls below a specified price (the option’s “strike price”). When we accept that obligation, we receive instant income in the form of a premium.

Now, one thing we recommend to lower the risks of this strategy is to only sell puts on stocks you wouldn’t mind holding in your portfolio anyway. So, worst-case scenario, if you make a trade and the stock falls below the strike price, that’s okay. It simply means you’re buying shares of a stock you liked anyway, and for a better price than before.

Keep in mind, this isn’t an official recommendation. Consider it a “bonus” trade. Although it was identified by Amber’s award-winning Income Trader Volatility (ITV) indicator, we recommend you do your own due diligence.

The chart below shows the trading action for the underlying stock. In the upper section, you’ll see the stock’s weekly price movement, while the bottom section shows Amber’s ITV indicator (red line) against the 20-week moving average (blue line). When the indicator drops below the moving average, it’s considered a “buy” signal.

If you want to follow this trade, remember to use limit orders to ensure you get the best possible price. Also keep in mind that options pricing can move quickly, so it’s on you to determine whether the most recent pricing is still suitable for you. And if the trade moves sharply against you, be prepared to cut your losses with a “buy to close” order if you’re not prepared to own the stock outright.

We think selling puts is one of the best ways to earn extra income out there, and that more investors should give it a try. So if you’d like to get more trades like this, then go here now to learn more.