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.
Believe it or not, the following is taken from October 2022 (with a couple of updates). Inflation almost always takes longer to tame than we think.
A question that may be on a number of people’s minds is: How long will it take to tame inflation? Unfortunately, there is very little telling how long it will take the US Federal Reserve, or any other entity or force, to tame inflation, especially in the short-term. Part of the reason is because inflation is always part of a complicated economy – with diverse people, businesses and governmental/fiscal forces in action. Timing (and hard-landing/soft-landing) predictions about inflation are nearly impossible.
For a bond that must be held for a minimum of five (5) years for full interest to be received and can only be bought in amounts of $10,000 per year, I get a lot of questions.
To put the situation in perspective, for clients and friends with high levels of income, in the hundreds of thousands and much more, and high tax rates – marginal rates of over 32% – the interest at stake with an I-Bond is currently $600 to $800 per year and that is before taxes! That level of net interest may pay a portion of one car lease payment per year or weekend gas for a boat (in 5 years). BUT nevertheless, I get questions.
From the recent archives of TGIF 2 Minutes – especially worth a second look as the year 2023 unfolds. Inflation recently came in at a still very high 6.5%… which seems “low” only because several months ago inflation was at 9.1%. Shelter and services (including daycare) remain the areas with highest inflation; gas, autos, computers, and sporting goods saw slower rises in still high prices. Employment remains an oddly strong component of the economy – leaving the likelihood of a “soft landing” type of economic slowdown a possibility.
Sept 2022: It is fairly safe to say that the US has entered a recession, even if the backwards looking, narrowly focused, official “National Bureau of Economics Research”, or NBER, has not declared it yet. The NBER is a private, non-profit organization founded in 1920 that somehow came to possess the distinct “responsibility” of declaring recessions in the US. Seriously?
A cautionary note (please pardon the math on a Friday) on home prices and home mortgage affordability in the short- to intermediate-term future. This note can also be useful for those with HELOC loans, or home equity lines of credit, with floating interest rates.
Inflation has recently had an overlooked side effect: a decline in the amount of home that a given monthly mortgage payment buys. The obvious factor is that interest rates on 30-year mortgages have skyrocketed from around 3% about 10 months ago to over 7% today. (Note, there is a sound but painful reason for interest rates to have risen. Historically, higher interest rates are one of the most proven ways to gradually – emphasize, “gradually” – control inflation or slow down an over-heated economy).
A question that may be on a number of people’s minds is: How long will it take to tame inflation? Unfortunately, there is very little telling how long it will take the US Federal Reserve, or any other entity or force, to tame inflation especially with respect to the short-term. Part of the reason is because inflation is always part of a complicated economy – an economy with diverse people, businesses, and governmental/fiscal forces in action. Making timing (and hard landing/soft-landing) predictions about inflation is nearly impossible.
To add to the confusion, believe it or not emotions – specifically people’s expectations of inflation – are part of what keeps inflation around. In this inflationary cycle, inflation has stuck around longer than at almost any time in US history; long enough to increase people’s expectations that inflation will 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 this boat due to forces out of its control, namely, the pandemic aftermath).
Dedicated readers of TGIF 2 Minutes will recall highlights two weeks ago of Morgan Housel’s excellent book, The Psychology of Money. Digging deeper into the book revealed the theme that human nature and psychology most often lead people to hear – and believe – only what they want to hear and believe or see happen.
This statement is not an insult or meant to sound arrogant. Rather, in matters of money, financial markets and even the economy there is evidence that people, the more they want something to be true, most often will believe a story that overestimates the odds of the story being true.* The markets, following recent comments by Fed Chairman Jerome Powell, nudged UP on thoughts the Fed might “pivot” (meaning: possibly slow the pace of interest rate increases and even lower interest rates next year – a wishful “story”). But more recent moves down in markets reflect the less popular belief that the US Federal Reserve likely will NOT reverse course, thus continuing to raise interest rates until inflation shows evidence of cooling.
Today’s TGIF 2 Minutes was delayed to reflect a speech given earlier today in Jackson Hole, WY by US Federal Reserve Chair, Jerome Powell.
Earlier today (Friday) US Federal Reserve Chairman Jerome Powell spoke in a widely anticipated speech at an annual meeting of the Kansas City Federal Reserve Bank. The market and investing worlds were looking for guidance from the Fed Chair regarding interest rates and future inflation. Part of the reason for the speech being so closely watched goes back to a former Fed Chair. For those old enough to remember, in December 1996 Alan Greenspan made a now famous speech that rocked the markets when he coined the term, “irrational exuberance.” Then Fed Chairman Greenspan commented,
“How do we know when irrational exuberance has unduly escalated asset values…?” Greenspan went on, “We should not underestimate or become complacent about the complexity of the interactions of asset markets and the economy.”*