Our Insights

Despite a seemingly endless parade of global and domestic troubles, the US economy continues to show strong consumer driven growth while both Europe and China struggle.  First quarter company earnings look solid so far. The application of amazing advances in technology, enhancing everyone’s standard of living is a theme that continues to be in place.

Tempering this growth and increasing financial market volatility is inflation, now ‘spinning out of control’ – so say recent media headlines.  And, of course, it seems so at every gas fill-up or trip to the grocery store.  We are also seeing significantly higher commodity prices – building materials, fertilizers, agricultural products, metals, etc.

The latest published Consumer Price Index (CPI) is 8.5% over the past 12 months (with gasoline prices soaring 18.3%). In March, the Producer Price Index (PPI) jumped 1.4%, and it is now up an incredible 11.2% in the past 12 months.

Given all the global trauma (such as Covid, the Russian invasion of Ukraine, excessive government spending and money printing) over the last few years, the Federal Reserve will likely raise key interest rates by 0.5% at its upcoming meeting. It’s also generally accepted that the Fed will need to follow up with multiple additional rate hikes over the rest of the year to a point that constrains economic growth without pushing the economy into recession – a very tricky balancing act that the Fed has rarely performed.

Aside from key interest rate hikes, the Fed has also taken steps to unwind its quantitative easing policies and shift gears to quantitative tightening (QT) – and that’s impacting Treasury yields. Monthly reductions in the Fed balance sheet of $50 billion or more will be necessary to achieve monetary normalization. Anticipating the rate hikes and QT, the 10-year Treasury has risen above 2.9% – its highest level in three years.

Hopefully, the Fed is not facing a similar inflation conundrum as former Fed Chairman Paul Volcker experienced in the early 1980’s when the Fed Fund rate was raised to 20%!  Such wide swings in the Fed Funds rate are very disruptive to businesses, especially real estate.  Due to what have turned out to be significant counter inflation factors in place today, such as advances in technology, making every area of the economy more efficient and less costly, coupled with greater energy supplies, there is a ‘soft landing’ opportunity.

Five-year consumer inflation expectations must be watched closely, a key economic barometer, signaling whether inflation becomes structural, not transitory. A recent reading indicates that inflation expectations may be peaking. However, for inflation to begin quieting down, energy supplies must increase, bringing down oil prices. Also, generally, global ‘supply chain’ issues for many products (especially semi-conductors) must be resolved.

Expect more stock and bond market headwinds and volatility as all these factors continue to unfold.