My Dad jumped a 1966 Chevy Impala off a road and ended up 75ft down a ditch in front of my future elementary school playground. The landing was so rough that he totaled the car. He had just gotten back from Vietnam and was working overnights as a welder at a tank manufacturer and had fallen asleep at the wheel driving home. Once he went off the road there wasn’t anything he could do to make it a soft landing.
Right now, the Federal Reserve is trying to work out a soft landing too. They are going into full inflation-fighting mode by trying to slow the economy to stop rising prices but without doing it too much that the US goes into a recession. The track record of Federal Reserve pulling off soft landings isn’t encouraging.
Last Wednesday the Federal Reserve announced the strongest interest rate increase in more than 20 years to calm the US inflation. They raised the Fed’s benchmark interest rate by 0.5 percentage points which followed a 0.25 percentage point increase in March.
Analysts expect more rate rises this year since the Fed “anticipates that ongoing increases in the target range will be appropriate.” I think there could be four to five more increases in 2022. One positive note by Fed Chairman Jerome Powell soothed markets when he said that the rumored 75 basis point hike “isn’t something the FOMC is actively considering.”
I think they moved too late, exasperated the inflation, and are now trying to play catch up. We were going to have inflation anyway because of the supply chain and massive stimulus payouts during the pandemic, but I think their slow response made these much worse.
The Fed also announced a plan to shrink its $9 trillion asset portfolio balance sheet on June 1. The plan is to reduce their balance sheet of Treasury and mortgage securities by $47.5 billion per month in June, July, and August and, in September start reducing it by $95 billion per month.
The effect of the Fed’s policy changes is already being felt in the economy. Since January, we have seen mortgage rates rise almost 2% which is their quickest rate of increase in decades. Not to mention some stock market selloffs.
I think the markets have mostly “priced in” the expected 2022 Fed rate hikes for the year since Treasury yields have risen by 100 to 200 basis points already this year, which is the sharpest yield rise in decades.
What to do? There is a chance of recession this year but not a strong one. I do think we are in the mid-to-late-cycle of this current economic cycle. Early in the economic cycle, you can hunt profits with a shotgun but late in a cycle, you need to be more of a sniper.
Many advisors still favor stocks over bonds because of valuation pressures on bonds from higher interest rates. During times like these some advisors like a low-volatility stock strategy to lean a person’s stock exposures to more defensive stocks.
The funny thing about my dad’s wreck is that he “only” jumped 30ft initially but ended up 75ft by the time he stopped. That’s because when he landed and woke up, he still had his foot on the gas and kept driving down the ditch until two boulders stopped him. I’m not saying the Fed was asleep at the wheel, but I will say that when they finally woke up and realized we had an inflation problem they kept their foot on the gas too long and made things worse. Let’s hope there aren’t any economic boulders ahead for us to slam into.
Have a blessed week!
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.
