- Excerpts from a TGIF 2 Minutes written 11 1/2 months ago follow.
- Today, the US Fed is not finished raising interest rates.
- Inflation is still around for multiple reasons.
- Note the emphasized comments in bold.
Wind back to October 2022: A question that may be on a number of people’s minds was, “How long will it take to tame inflation?” Unfortunately, there was very little telling. Part of the reason is that inflation is always part of a complicated economy. Predictions about the timing of inflation (and hard-landing/soft-landing) are nearly impossible.
To add to the confusion, emotions – specifically people’s expectations of inflation – are part of what keeps inflation around. In this inflationary cycle (as of October 2022), inflation had already stuck around longer than at almost any time in US history; long enough to increase people’s expectations that inflation would not go away quickly. The US Fed had stated one of its original intentions was to lower consumers’ inflationary expectations. But the Fed may have missed that boat late in 2021 due to forces out of its control, namely, the pandemic aftermath. Note that today in late September 2023 inflation is still running strong.
These are not excuses for the Fed; these concepts regarding inflation have been around for decades dating back to at least the early 1900’s. Economists and market experts typically factor in two years or more for changes in Federal Reserve interest rate policy to trickle into and improve economic conditions.
Will it take two years for Fed interest rate changes to make a difference in today’s economy? Possibly not – because everything moves faster now than in 1970, 1980, 2002 and even 2013. Although, as of September 2023, the two-year (or longer) time frame may be accurate.
Back in 2022, the Fed was attempting to normalize its benchmark short-term interest rate nearer to an average level of around 4.61%. Compare this average to the near-zero rate in the benchmark rate from 2009 to 2021. (Today in late 2023, the benchmark interest rate is 5.25% to 5.50%.)
In moving more quickly to set higher levels of interest rates, the US Fed seemed last year to be attempting to speed up the process of lowering inflation to tame the economy. Short-term stock and bond market reaction was harsh.
Last year in October 2022 the conclusion was:
- It remains to be seen how the “medicine” of more normalized (read: higher) short-term interest rates will affect the “patient”, or the economy, consumers, and markets. The timing may be at least a year from now – positive or negative for the markets – to see ultimate results of the Fed’s attempts to slow inflation quickly.
Now this year in late September 2023:
- It still remains to be seen how much longer inflation – which has now been engrained in people’s lives for over two years – will stick around.
Save and spend accordingly in the short-term. Invest for both the short- and longer-term – using equities, bonds, and cash. Inflation remains a strong factor.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied upon for, tax, legal or accounting advice.