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Inflation and Rising Interest Rates

Inflation and Rising Interest Rates

December 19, 2022
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Fed Chair Jay Powell’s plan is to keep raising interest rates until he reaches what’s called the terminal rate.

What’s the terminal rate? No one knows the exact number, but the Fed has adopted the attitude of “we’ll know it when we see it.” The working definition is a rate that’s high enough to bring down inflation on its own with further rate hikes.This means (according to Powell) two more rate hikes after tomorrow at the next Federal Open Market Committee (FOMC) meetings in 2023. That includes a rate hike of probably 0.50% on February 1, 2023 and 0.25% on March 22, 2023.

Producer Inflation Report Reveals Sky-High Food Costs

Yesterday, the Labor Department released the Consumer Price Index (CPI) report, and stocks soared on a drop in year-over-year inflation. The mainstream media rejoiced...the Biden administration ran a victory lap...and Wall Street smiled. Last Friday, another lesser-known and oft-misunderstood inflation report dropped which is the Producer Price Index (PPI) report. This tells a concerning story. Let me set the stage for you...PPI measures inflation for the producers of goods, while CPI measures consumer inflation. It's an important report to follow, because rising input costs for producers will soon mean higher costs for you at the store. We are a long way from 2% inflation goals on any metric.

You can witness the supply chain and demand issues in the next chart relating to pricing over the past 3 years.  Globally there are still some real challenges which will take years to balance even without political disruptions.

To bring inflation down the Fed is doing two things at once: 1) Reducing money supply and 2) Raising interest rates. The .50% increase on 12/14/2022 brings the effective rate to 4.25-4.50%.  This creates issues as stocks (declining profits) and bonds (real rates of return) will continue to be challenged. History tells us that until something breaks the Fed will not change the overall direction.  I have studied and witnessed this for many years and, in my opinion, a change in direction may take another 6 to 12 months unless there is a “meltdown” event.

https://fred.stlouisfed.org/series/FEDFUNDS   12/14/2022 .50% increase now brings it to 4.25-4.50%.

PATIENCE: the capacity to accept or tolerate delay, trouble, or suffering without getting angry or upset.

There will be great investing opportunities heading our way when the Federal Reserve or Act of Congress make their next big move. Have a wonderful holiday season with your loved ones and try not to over think the markets. We have a long way to go.

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Data and rates used were indicative of market conditions as of the date shown. Opinions, estimates, forecasts, and statements of financial market trends are based on current market conditions and are subject to
change without notice. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer, or recommendation to purchase or sell a security.
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