In the past few months, the markets have traded within a very narrow range. For much of it, the overriding factor has been the likelihood of more interest rate increases on the part of the Fed. Markets have been hoping for a more immediate pause in rate hikes. Some, with opaquely rose-colored glasses, even thinking a rate cut may be in the cards! The data, however, and Fedspeak, have provided indications to the contrary.
The labor markets continue to improve and, despite layoff in the tech sector specifically, the unemployment rates remains at historic lows. For a Fed that is trying to slow the economy, this is not evidence its efforts have been effective.
Inflation remains high, at both the producer and retail levels. We track the PPI (Producer Price Index), which is a measure of the cost of production, which necessarily flows down to consumers at the retail level, and is measured in the CPI (Consumer Price Index). Most of the Fed’s efforts have been around bringing these figures down from their 2022 highs.
While the Fed has garnered marginal success to these ends, inflation remains sticky, which fuels concern across markets.
The Fed has a stated goal of bringing inflation down to 2%, which is historically a bit ridiculous and, frankly, arbitrary. Core inflation has run at an average of 3.3% since 1960, according to Ycharts.com. The Fed has boxed itself in to a goal that is 60% lower than should be reasonably be expected.
Recent Fedspeak has hinted at the possibility of a more prolonged period of increases, though at a less dramatic rate.
One thinks that the Fed must understand, at least tacitly, that 2% is untenable and, in order to achieve it in the near term, would require economy-crushing interest rates. It seems reasonable to expect, then, that a target rate of 3% would satisfy the Fed, while allowing the economy the possibility of avoiding a deep recession.
We think the Fed continues to raise rates, before pausing. So many of the economic indicators that the Fed and other economists rely on are lagging indicators. For example, people don’t lose their jobs until after companies are negatively impacted by the economy; home sales may not slow until after interest rates have made their way through the economy; increase in producer prices are then passed down to consumers.
We expect the Fed to eventually take a breather to give the economy time to catch up. With so much action on its part in the last year, many of the results are yet to be felt. It makes sense to see how the medicine is working, before upping the dosage, so as not to kill the patient.
Continue to work closely with your Certified Financial Planner® professional, to help ensure that your wealth management strategy accurately reflects changes in the markets, and changes in your life. While we can’t say exactly when, we do believe conditions will normalize.
Stephen Kyne, CFP® is a Partner at Sterling Manor Financial in Saratoga Springs and Rhinebeck. Securities offered through Cadaret, Grant & Co., Inc. Member FINRA/SIPC. Advisory services offered through Sterling Manor Financial, LLC, an SEC registered investment advisor or Cadaret Grant & Co., Inc. Sterling Manor Financial and Cadaret, Grant are separate entities.
