Are Fed Actions Working? Parsing the New Data

After April’s downturn, the first two weeks of May have not seen substantial improvement. By Thursday, May 12, markets were dangerously close to bear territory. The Fed enacted a 50-basis point increase in the Fed funds rate at the May FOMC meeting, and we also now have April’s key data. In addition, Fed Chairman Powell sat for an interview in which he discussed his definition of a “soft landing” and what it will take to get there.

Our three main points are the labor markets, interest rate hikes, and economic growth as measured by GDP. Let’s dive in.

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May Market Commentary: The Fed Owned It, But Can They Control It?

April Recap and May Outlook

COVID concerns took a definitive backseat as mask mandates on flights ended, and the concerns about the economy turned to how bad things will get. The concerns over the disruption of the ongoing war in Ukraine, 40+ year record inflation, and the resulting amping up of the Fed’s intentions on rate increases moved distinctly into the foreground. Let’s look at some headlines:

  • The IMF released projections for the impact of the war in Ukraine. Global growth will likely slow from an estimated 6.1% in 2021 to 3.6% in 2022 and 2023. This is 0.8 and 0.2 percentage points lower for 2022 and 2023 than projected in January.

  • The war isn’t just impacting growth. The IMF also reported that war-induced commodity price increases and broadening price pressures have led to 2022 inflation projections of 5.7% in advanced economies and 8.7% in emerging market and developing economies—1.8 and 2.8 percentage points higher than projected last January.

  • In remarks at a panel discussion at the IMF on April 21st, Chairman Powell reiterated that it is appropriate “to be moving a little more quickly” on rate hikes. That translated into guidance on the first 50-bps rate increase in 22 years.

  • Economists began talking about “stagflation.” Stagflation is high inflation, high unemployment, and slow or negative real economic growth. Stagflation fears rise out of the potential for the Fed to overshoot and tip the economy into recession. Another way to think of stagflation is a circular firing squad. In stagflation, the moves the central bank makes to rescue the economy push it further into recession.

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What’s Driving the Recent Volatility? A Quick Guide

The Federal Reserve has been very clear about its intentions to move more aggressively in fighting inflation. It currently defines “more aggressively” as a likely series of 50 basis point rate hikes, beginning with the May Federal Open Market Committee meeting. This will mark the first time in 22 years that the Fed has doubled the normal 25 basis point increase.

In remarks at a panel discussion at the IMF on April 21st, Chairman Powell reiterated that it is appropriate “to be moving a little more quickly” on rate hikes. He also indicated that he believes that financial markets are “acting appropriately generally,” meaning that they are adjusting to the expectations of higher rates.

Markets are forward-looking, so prices today reflect what markets think will happen in the future. A good example of this is mortgage rates: The average rate on a 30-year fixed-rate mortgage was 5.29% as the last week of April opened. For contrast, in early March, it was 3.76%.

Markets are having trouble interpreting this information. The problem is that so far, we’ve heard the Fed’s intentions, but without corresponding data showing whether or not rate hikes are working, markets can’t assess the likely path. And that leads to volatility.

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What’s the Fed Up To? Rates, Inversions, and Quantitative Tightening

The U.S. Treasury yield curve inverted last week. An inversion is when the shorter-term yield in a pair of U.S. Treasury maturities is higher than the longer-term yield, reversing or inverting the normal relationship. The significance of a yield curve inversion is that inversions have a history of predicting recessions.

The yield curve inverts because investors believe that the economy will slow in the future. The Fed attempts to control inflation by increasing interest rates, which makes business investment more expensive. Markets appear to think that the Fed will overshoot with rate increases, which will stifle rather than slow economic growth. The Fed will then have to begin decreasing rates again.

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The Federal Reserve vs. Inflation: Round One

Wednesday’s long-anticipated announcement by the Federal Reserve that the key Fed funds rate would increase by 25 basis points and the accompanying statement by Chairman Powell had the immediate impact of reassuring the markets. St. Patrick’s Day may not have brought pots of gold, but after thirteen no-good, very bad weeks for the S&P 500, we’ll take a push back into positive territory.

Will it last? Given the invasion of Ukraine, the impact of sanctions, the downstream effect on supply chains and food supply, and the geopolitical uncertainty unleashed by Russia’s aggression, the Fed’s job in fighting domestic inflation is much harder now.

We walk through the Fed’s move and Powell’s language, the impact of the rate increase, and what investors can do to prepare their portfolios and budgets.

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GMB Ep #105: All About Inflation

 

From October 2020 to October 2021, the Consumer Price Index for All Urban Consumers grew by 6.2 percent, which according to the Bureau of Labor Statistics, was the most significant 12-month gain since November 1990. In relation to this data, we have dedicated today’s episode to exploring more about inflation. Throughout this episode, Grant shares his thoughts about the impact of inflation on the present economic environment and numerous ways to mitigate the risk of inflation.

 

 

Show Notes

[04:21] CPI – Grant explains what CPI is and its relationship with the inflation rate.

[06:40] Inflation – Grant explains inflation in simple terms, pointing out several misconceptions about it.

[09:20] Will the History Repeat? – Grant analyzes and compares the current economic context in the US with the economy in the late 70s and early 80s.

[10:12] Gold and US Dollars – Grant broadly explains the evolution of the relationship between gold and US dollars.

[15:30] Present Economic Situation – Grant delves deeply into the current economic climate in the United States from various perspectives and then provides his thoughts on those observations.

[20:55] TIPS – Grant discusses how increasing your allocation to Treasury Inflation-Protected Securities can act as an inflation hedge.

[23:32] Series I bonds – Grant identifies investing in these types of bonds as an excellent alternative to hedge inflation.

[28:26] Investing in Gold – Grant discusses the potential of investing in gold and shares his thoughts on the matter.

[32:12] Equity – Grant identifies equities as an excellent inflation hedge in the long term.

[34:52] Asset Allocation– As a final remark, Grant discusses his ideas on asset allocation in general.

 

Resources

Bureau of Labor Statistics & CPI-U: bls.gov/cpi/

Treasury Direct & Series I Bonds: treasurydirect.gov/indiv/products/prod_ibonds_glance.html

Market Review: Q3 2021

Market Update: Q3 2021

Even though the delta variant has many areas reconsidering reopening & masking protocol, the world’s economic rebound is in full force.  The U.S. economy added 943,000 jobs in July, unemployment fell to 5.4% from 5.9%, and global earnings estimates continue being revised upward.  These are all positive themes.

The underlying theme giving some investors pause is inflation.  Monthly inflation numbers have continued to lurch upward, despite the Federal Reserve’s insistency that it’s “transitory”.

Will prices continue higher?  They could.  We just passed a $3.5 trillion bill immediately after a $1 trillion infrastructure bill.  This type of fiscal policy injects a whole lot of dollars into and through the banking system that we’ll have to borrow to finance.  With more dollars chasing the same amount of goods and services available, prices tend to get pushed up.

But then again, many of the price increases we’ve seen recently are supply chain oriented.  Computer chip shortages have driven up used car prices.  Lumber costs are still high as there’s simply not enough available to supply the glut of home improvement projects.  The common thread here is that factories and manufacturing facilities are still crawling back to full capacity.  Many workers used the pandemic as an opportunity to change careers or jobs.  Some decided not to go back to work at all.  So while prices of the goods & services we all enjoy do continue to march higher, the real question will be what happens once capacity is truly back at full strength.

Here’s this quarter’s market review.

 

Market Review: Q3 2021
Market Review: Q3 2021

Market Review: Q3 2021

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GMB Ep #77: Investing in an Inflationary Environment

Last week, The Bureau of Labor Statistics released some metrics that indicate we might be experiencing a higher rate of inflation than the federal reserve and other stakeholders have been expecting. We dedicated today’s episode to exploring what inflation is and why we should be concerned about it. Throughout the episode, Grant dives into how inflation occurs, how it influences the economy, how to measure inflation, the role of the federal reserve in keeping the economy stable, and what investors should keep in mind about maintaining a healthy portfolio in an inflationary environment.

 

 

Show Notes

[04:45] Understanding Inflation – What inflation is, why it happens and why we should be concerned about it.  

[07:25] Measuring Inflation – Grant reviews some of the methodologies and indices that are used for measuring inflation and how these measurements indicate recent changes in the prices of consumer goods and services. 

[13:25] Inflation and Deflation – Grant shares his take on why the two extremes of the spectrum can cause adverse effects on the economy and why maintaining a stable rate of inflation is better for the economy. 

[16:58] The Federal Reserve – How the federal reserve maintains its policies in order to keep the economy stable. 

[22:25] Inflation and Investments – How inflation affects investments and how different asset classes perform in inflationary environments. 

[25:14] Pricing Power – Why companies that offer products and services with higher pricing power can adapt better to inflation.  

[28:00] Diversification – Grant reviews some of the ways you can diversify your portfolio by taking advantage of assets that are less affected by inflation in the United States. 

[35:48] Real Assets – Grant shares his take on how real assets, including real estate, perform in an inflationary environment and what investors should keep in mind about investing in hard assets. 

 

Resources

Consumer Price IndexU.S. Bureau of Labor Statistics: 
www.bls.gov/news.release/cpi.toc.htm