Feb 4th, 2023: The Fed’s Balancing Act – Lower inflation and full employment This week the Federal Reserve raised interest rates to 4.75%. Chairman Powell hinted that the central bank still expected to raise rates to just above 5 percent and then leave them there throughout 2023. “We’re talking about a couple more rate hikes to get to that level we think is appropriately restrictive,” he said. He later added that he did not expect to cut rates this year if the economy performed as expected. Even though higher interest rates has slowed corporate earnings, the economy remains robust. On Friday the jobs report blew out expectation adding around 517k jobs, which exceeded the expectations of 187k new jobs. The services industry continues to thrive, making up the largest and fastest-growing sector and playing a crucial role in employment and economic growth.
After the tough year last year, people are starting to see returns on their money. This has been one of the best investment environments for both low and high-risk investments. The risk-free rate is nearing 5% and technology stocks have had a great start to the year. Value stocks which outperformed last year have lagged this year as all the new money is rotating into tech stocks. The earning reports from technology companies have been mixed and there is not much revenue growth in many tech companies. Google, Microsoft, Apple, and Amazon all missed earning expectations but the stock prices have risen this year because of cost cutting and buybacks.
The recent increase in interest rates and high inflation has had a mixed impact on the economy and financial markets. On one hand, the rise in interest rates has been good news for retirees and other fixed-income investors who have been able to earn higher returns on their investments in bonds and other fixed-income securities. However, the same increase in interest rates and inflation that has been beneficial for these fixed-income investors has also had a negative impact. The pace of inflation has also been eroding the purchasing power of many individuals, especially retirees on fixed budgets. The rise in interest rates and inflation will eventually have a negative impact on the economy as a whole. As interest rates increase, it is becoming more expensive for businesses to borrow money and invest in new projects. This will eventually slow down economic growth and lead to a decline in business investment and lower job creation.
Given these competing forces, it is important for the Fed to carefully consider the impact of interest rates and inflation on the economy. The Federal Reserve, for example, has a dual mandate of promoting both price stability and full employment. As interest rates and inflation rise, it becomes more challenging for the Fed to achieve both goals at the same time. The Fed will need to continue to closely monitor these trends and make adjustments as necessary to maintain economic stability and support job growth. So far it looks as though the Fed will pull off a soft landing, which is lowering inflation without causing a deep downturn. It seems the risk at the moment is too much economic strength which increases demand and keeps prices high.
Investors will continue to monitor the next move by Chairman Powell and the Fed. The challenge going forward for the Fed is they have limited control over long term rates. The yield on the 10-year bond rate is around 3.50% and the short end of the curve, which is controlled by the Fed is headed to 5%. This is great time for generating income because of these higher short term interest, but with the long bonds at such low rates it is will make the Feds job of stopping inflation that much more difficult. The long rates are having more of an impact on the economy than the short term rates. The higher inflation is causing a slowdown in certain parts of the economy and has taken a toll on some families.
According to The WSJ, a record 2.8% of the five million people in 401(k) plans managed by Vanguard Group had to tap into their retirement savings in 2022 to cope with hardships such as medical bills, evictions, or foreclosures. This is up from 2.1% in 2021 and a pre-pandemic average of about 2%. Hopefully, the best economic scenario plays out this year which is falling inflation, weaker economic growth, and a strong job market. This should help to ease some of the hardships experienced last year and allow the Fed to normalize interest rates going forward.
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This week the Federal Reserve raised interest rates to 4.75%. Chairman Powell hinted that the central bank still expected to raise rates to just above 5 percent and then leave them there throughout 2023. “We’re talking about a couple more rate hikes to get to that level we think is appropriately restrictive,” he said. He later added that he did not expect to cut rates this year if the economy performed as expected. Even though higher interest rates has slowed corporate earnings, the economy remains robust. On Friday the jobs report blew out expectation adding around 517k jobs, which exceeded the expectations of 187k new jobs. The services industry continues to thrive, making up the largest and fastest-growing sector and playing a crucial role in employment and economic growth.
After the tough year last year, people are starting to see returns on their money. This has been one of the best investment environments for both low and high-risk investments. The risk-free rate is nearing 5% and technology stocks have had a great start to the year. Value stocks which outperformed last year have lagged this year as all the new money is rotating into tech stocks. The earning reports from technology companies have been mixed and there is not much revenue growth in many tech companies. Google, Microsoft, Apple, and Amazon all missed earning expectations but the stock prices have risen this year because of cost cutting and buybacks.
The recent increase in interest rates and high inflation has had a mixed impact on the economy and financial markets. On one hand, the rise in interest rates has been good news for retirees and other fixed-income investors who have been able to earn higher returns on their investments in bonds and other fixed-income securities. However, the same increase in interest rates and inflation that has been beneficial for these fixed-income investors has also had a negative impact. The pace of inflation has also been eroding the purchasing power of many individuals, especially retirees on fixed budgets. The rise in interest rates and inflation will eventually have a negative impact on the economy as a whole. As interest rates increase, it is becoming more expensive for businesses to borrow money and invest in new projects. This will eventually slow down economic growth and lead to a decline in business investment and lower job creation.
Given these competing forces, it is important for the Fed to carefully consider the impact of interest rates and inflation on the economy. The Federal Reserve, for example, has a dual mandate of promoting both price stability and full employment. As interest rates and inflation rise, it becomes more challenging for the Fed to achieve both goals at the same time. The Fed will need to continue to closely monitor these trends and make adjustments as necessary to maintain economic stability and support job growth. So far it looks as though the Fed will pull off a soft landing, which is lowering inflation without causing a deep downturn. It seems the risk at the moment is too much economic strength which increases demand and keeps prices high.
Investors will continue to monitor the next move by Chairman Powell and the Fed. The challenge going forward for the Fed is they have limited control over long term rates. The yield on the 10-year bond rate is around 3.50% and the short end of the curve, which is controlled by the Fed is headed to 5%. This is great time for generating income because of these higher short term interest, but with the long bonds at such low rates it is will make the Feds job of stopping inflation that much more difficult. The long rates are having more of an impact on the economy than the short term rates. The higher inflation is causing a slowdown in certain parts of the economy and has taken a toll on some families.
According to The WSJ, a record 2.8% of the five million people in 401(k) plans managed by Vanguard Group had to tap into their retirement savings in 2022 to cope with hardships such as medical bills, evictions, or foreclosures. This is up from 2.1% in 2021 and a pre-pandemic average of about 2%. Hopefully, the best economic scenario plays out this year which is falling inflation, weaker economic growth, and a strong job market. This should help to ease some of the hardships experienced last year and allow the Fed to normalize interest rates going forward.