Jerome Powell and The Federal Reserve have recommitted to fighting inflation. Following the recent bottom in mid-June, markets quickly responded by recovering from bear market territory. In August, additional student aid was provided which is inherently inflationary. The Fed announced the following day that rates will continue to rise until inflation is completely eradicated. Read on for a recap of the journey and where markets may head next.
Inflation began to rear its head in the beginning of 2021, rising from 1.4 to 4.2 over the four months to start the year. At this point the economy was fragile, and signs of danger were just emerging. Levels have continued to rise and remain elevated forcing action to alleviate systemic pricing issues. We’re all familiar with the increase pain at the pump and increased cost of groceries, but inflation has a greater destabilizing force. Price stability preserves the purchasing power and integrity of the nation’s money. It forms one of the critical components to a healthy growing economy and cannot be substituted.
When inflation increases and stays elevated, the Fed steps in to attempt to get it under control. The primary tool in the Fed’s toolbox is control over interest rates. The relationship between inflation and interest rates (at least in theory) is very direct. A decline in interest rates makes money more available throughout the economy – an action that contributes to inflation. On the contrary, an increase in interest rates makes borrowing money more costly – a story that will be undoubtedly familiar to anyone financing large purchases this year.
In early 2022, the Fed initiated the fight against inflation. Interest rates have been raised four times this year as of the last Fed meeting in July. In August the Fed met in Jackson Hole, Wyoming and publicly reaffirmed their commitment to combatting inflation through additional rate hikes. The overwhelming take away is that the economic conditions that will exist moving forward are different than they have been in the past. Any business relying on borrowing money to grow will be most affected by the rises in interest rates.
Under normal historical conditions, steady growth in the equities market is complimented by a robust bond market. The Fed is attempting to restore historical operating standards. In the short term, a bumpy road lies ahead as interest rates continue to rise. The Fed has forecasted three additional rate increases through the remainder of 2022 – and the market has those priced in. The Fed meets again in September to discuss the next round of interest rate hikes. Consensus is that they will increase by .75% - in keeping with projected forecasts. Any deviation from that plan will likely be met with compensatory changes in the markets.
As we look toward the end of the year, we will continue to invest in the best available investment opportunities. Steady and reliable companies are now available at prices that are favorable to long term investors. Our intention is to continue to focus on the long term and position ourselves as strongly as possible looking forward.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.