Whittling a stick is therapeutic. I spent a lot of time as a boy whittling down a stick with my trusty Old Timer knife. First, the bark and then the softwood until you see the dark grain. I would play a game with myself, whittling it as thin as possible without breaking the stick in half. Right now, the Federal Reserve is trying to whittle down our economy without the economy going into recession.
The Fed raised its benchmark rate on June 15th by 0.75% the biggest jump since November of 1994. The jump was bigger than expected even a week ago but with the June 10th Consumer Price Index (CPI) inflation report showing inflation sped up in May despite the Fed’s efforts to slow it down, they had to go big.
So, what is the Fed actually trying to do? They are trying to whittle down the US economy to slow down inflation but not so much that the US goes into a recession. Slowing the economy enough to cool inflation, but not too much to cause a recession is extremely tricky.
Just like my whittling stick, there is a point when raising rates where the economy breaks (recession.) No one knows exactly where that breaking point is in this economic cycle but the last cycle that breaking point was about 2.5% when it started affecting the economy (we are at 1.5-1.75 now). Our high inflation makes things different this time than it was that cycle, so it might be higher than 2.5% this time.
The Fed is trying to whittle the economy by slowing growth, but they don’t get to use an Old Timer knife. Their knife is monetary policy which is a blunt instrument, to say the least. Monetary policy is slow and takes a lot of time to take effect. I think the Fed was late to the game on inflation, but their response now is appropriate and will help the inflation in time.
In every market, there are winners and losers. I think investors should stick to their plan and be looking for market opportunities rather than heading for the exits.
These are tough times in the market but it is a normal part of the cycle. It’s stressful for both investors and advisors. As a stress reliever, I suggest you grab a pocketknife and take out your frustrations whittling down an old stick. Just be sure to cut away from you, I learned that the hard way.
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.