The Federal Reserve Decision
As we expected, the Federal Reserve raised interest rates by 25 basis points, which indicates a belief that inflation is starting to slow. Recent numbers confirmed that belief as the CPI shows signs of finally tilting towards a more normal inflation pace.
The markets have been rallying based on a growing expectation that the economy will endure a shallow recession, or, if all goes perfectly, a soft landing. This sentiment has continued to grow as inflation numbers have fallen, while at the same time, the job market continues to be strong, (despite headline layoffs).
It is our view that the Federal Reserve will continue to slow the pace of its increases and that will be a positive for both the bond and the stock market. Last year was a very difficult year for investors. Both markets, equity and fixed income, suffered challenging losses; diversification in this one-year timeframe was not effective. Over the long term, we believe diversification to be effective and there are already signs of 2023 will help balance out some of the difficulties in 2022.
We continue to look closely at the inflation numbers and Federal Reserve minutes as we assess the direction of the economy. We’ve already adjusted portfolio strategies based on our expectations for 2023 and will continue to make adjustments as needed.
A recent NPR article outlined the actions of the federal reserve this week. Excerpts are provided below.
“The Federal Reserve raised interest rates by a quarter percentage point Wednesday, its eighth increase in less than a year as the central bank continues its crackdown on inflation.
The hike in the Fed's benchmark rate is the smallest since last March, and signs that policymakers are shifting to a more cautious approach, after spending much of last year playing catch-up and boosting borrowing costs at the fastest pace in decades.
Higher interest rates have begun to have the desired effect. Consumer spending has cooled in recent months. And inflation had dropped significantly, although prices are still climbing faster than the central bank would like.
"We're going to be cautious about declaring victory and sending signals that we think the game is won, because we've got a long way to go," Fed chairman Jerome Powell told reporters.
While the price of some goods — like new and used cars — has started to fall, the Fed is concerned that the price of labor-intensive services may continue to climb. That would make it harder to get inflation back down to the central bank's target of 2%.“