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Inflation and The Fed

Coming into the Fed’s interest rate decision, most market participants expected the Fed not to raise rates, and those expectations were met. What made this meeting so important, and why did the market react the way it did? It’s because there’s still the unknown of whether or not this is a skip in terms of they didn’t do it now, but they just skipped one meeting they plan to raise in the future. Or is this a pause in rate policy where we will stay here for a while? The market before the meeting was pricing for a pause. The Fed was done, and 5-5.25% was the high point of the Fed Fund rate. What the Fed showed, though, is that they anticipate as many as three more hikes this year, which completely goes against the market. Many market participants were pricing in a cut by the end of the year, so the fact that the Fed is now putting out there that not only are they not done, but they could raise rates up to three more times within the year, is entirely off-side from what the market was saying. Chairperson Jerome Powell said they wanted to pause right now because they wanted to see data come in before deciding on hiking rates. Why did they say they would push rates out now but hike rates in the future? The reason is that the Fed wants to avoid getting into a situation where they have a stop-and-go Fed policy like the one that got us into trouble in the 1970s. They would raise rates, inflation would come down, and then inflation would pick back up. On a chart shown in this episode, you will see the inflation rates of the seventies, and the blue line on this chart is the current inflation rate pattern. You can see that while inflation is coming down, many more participants are asking since we’re now below 5%, potentially getting below 4% in the next few months, why consider hiking rates again? It appears as though we have beat inflation but in the seventies, inflation came down just as fast as now. However, it went back up because the Fed took its eye off the ball. That’s why Mr. Powell is using his words carefully and trying to guide the market into a future where we’re not cutting rates. Plus, we are still fighting inflation. The average US consumer goes to the store and doesn’t feel like the inflation flight has been won, but the market was pricing as if it were.


Pain in Corporate America

The Fed’s actions have had a negative impact on two areas of concern: our mortgage availability and an increase in corporate bankruptcy. Mortgage availability has fallen significantly, and mortgage credit availability has decreased for the third consecutive month. The industry continues to see more consolidation and reduced capacity due to lenders pulling back on loan offerings due to high rates. The Mortgage Credit Availability Index is now at its lowest since January 2013. We’re also seeing a spike in corporate bankruptcy. Higher rates matter. It’s clear that when the Fed started raising rates, bankruptcy followed. It’s not just the banks struggling with high rates; we also see the pain in corporate America.


Consumer Stress Indicator

Our Consumer Stress Indicator is down as we’ve seen inflation come down. It’s moved lower to 16.3%. Gas prices and food are stabilized and down from a year ago. By no means is the consumer out of the woods yet, but this inflation is a welcome sign of relief, with the likelihood of student debt payments restarting in the months ahead. It’s not all bad, but we are watching for economic and market cracks.


Bobby Norman, CFP®, AIF®, CEPA®
Managing Director
Wealth Consultant
Email Bobby Norman here

Trey Booth, CFA®, AIF®
Chief Investment Officer
Wealth Consultant
Email Trey Booth here

Fi Plan Partners is an independent investment firm in Birmingham, AL, with a team of professionals serving clients across the nation through financial planning, wealth management and business consulting. The team at Fi Plan Partners creates strategies in the best interest of their clients using fee based investing.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Economic forecasts set forth in this presentation may not develop as predicted.

No strategy can ensure success or protect against a loss.
Stock investing involves risk including potential loss of principal.

Securities and advisory services offered through LPL Financial, Member FINRA/SIPC and a registered investment advisor.

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