Federal Reserve’s Policy Trajectory
Jerome Powell of the Federal Reserve reiterated his commitment to continue to raise rates until the “job is done”. This means rates will go up until inflation is in check.
There are some initial signs that inflation is starting to peak (including oil prices finally starting to fall). But fuel prices continue to be a problem and we expect inflation to continue to percolate throughout the economy over the course of the next several months.
We believe the Federal Reserve will start to slow its interest rate increases after this next ¾ of a point increase. We are of the belief that inflation is starting to slow but we will be watching signs very closely.
DWM portfolios are invested on the assumption that interest rates are going to continue to increase. We have focused on underweighting durations on fixed income and are carefully analyzing each asset as to the effect of inflation on their corporate earnings. If the Federal Reserve raises too aggressively, the economy will be susceptible to a recession. We are currently assessing the recession impact on held positions. We are keeping our options open and assessing data. This includes comments and speeches from the Federal Reserve.
It’s important to note that interest-rates still are at historically low levels. The increases we are seeing now are moving interest rates back to more normalized level; that’s not the worst thing in the world. Company earnings can survive interest-rate increases.
As for data, we focus on wage growth as well as core inflation to give us clues as to where the Federal Reserve might do next. A description of core inflation is listed below in this week’s commentary.
Jeff Cox, in a recent CNBC article, added a few other insights. Excerpts are listed below.
“History cautions strongly against prematurely loosening policy,” the central bank leader said in a Q&A presented by the Cato Institute, a libertarian think tank based in Washington, D.C. “I can assure you that my colleagues and I are strongly committed to this project and we will keep at it until the job is done.”
The event was Powell’s last scheduled public appearance before the Fed’s next meeting on Sept. 20-21.
Markets largely took the comments in stride, with major averages little changed in the early going on Wall Street. Treasury yields were mostly higher, with the two-year note, the most sensitive to Fed rate hikes, rising by nearly five basis points to 3.49%. A basis point equals 0.01 percentage point.
The Fed has raised benchmark interest rates four times this year, with the fed funds rate now set in a range between 2.25%-2.50%.”