Here is what 2023 basically comes down to:
- Will the Fed be able to reduce inflation while at the same time avoid a hard landing because of an increase in interest rates?
- Will the Fed moderate its interest-rate policy based on changing expectations for inflation?
Inflation has been running rampant over the last 12 months and the Federal Reserve has taken action in response to the inflation numbers. As you can see in the chart below, inflation has spiked up considerably (though recently has started to come back down).
Because of the endless amount of cheap money thrown into the financial system by the Federal Reserve, we now have a pent-up bubble of demand. This demand has caused prices to go up including used car prices, food costs, housing costs, etc.
It is our expectation that the Federal Reserve will take action to reduce interest rates a bit more as they watch the effect of an unprecedented string of 3/4 of a percent increases layered on last year by the Federal Reserve.
We believe inflation numbers will come down significantly and there are already signs that it is impacting companies and their hiring plans. Tens of thousands of jobs have been lost in the technology sector, and we believe that other sectors will be subject to similar job losses (though likely not as extreme).
Our forecast is for a .25% increase this cycle, perhaps a .25% next time; we believe that a tapering by the Federal Reserve regarding interest rate increases will begin to occur mid-year. Believe it or not, we think it’s possible rates could be cut this year, if in fact, the economy goes into a deeper than expected recession.
At Destination Wealth Management, we are carefully watching inflation numbers, as well as the Feds reaction to those numbers. This right now is the critical component for the equity and fixed income markets. We are watching.