Feel the Need for Speed

Two important economic themes have dominated the landscape this year: high inflation and interest rates. The Federal Reserve has significant influence over rates. As the year has progressed, the Fed has recognized the need to speed-up its plans to raise interest rates and counter inflation.

Lael Brainard is a Fed official that was nominated for vice chair of the Federal Reserve. Brainard is not a household name, but her words carry weight, and she is someone who would be recognized by economists. She has the reputation of being dovish regarding Fed policy.

Before we go on, let’s clarify a couple of terms: a Fed hawk and a Fed dove. A Fed hawk leans toward higher interest rates to tackle inflation or keep it in check. A Fed dove leans to lower interest rates to stimulate spending and focus on unemployment.

In most cases, officials aren’t rigid and will shift their stance as economic conditions dictate.

The hawks circle

Last Tuesday, Brainard said that getting inflation down “is of paramount importance (WSJ).” Notice the emphasis—not just important, but of ‘paramount’ importance. That’s a strong word. It’s defined by Oxford as “more important than anything else; supreme.”

The former dove came out swinging, and it suggested that many of the more dovish members of the Fed are also serious about returning to price stability, i.e., through faster rate hikes.

Comments later in the week from other Fed officials included: we are “acutely concerned” about inflation, and high inflation “is as harmful as not having a job (CNBC).”

On Wednesday, the Fed released the minutes from its March meeting. The Fed hiked the fed funds rate by 25 basis points (bp, 1 bp = 0.01%), but the minutes revealed the Fed would probably have raised by 50 bp had not Russia’s invasion created near-term uncertainty.

Of course, how the economic outlook unfolds will play a big role in how quickly the Fed may boost rates. One closely followed gauge from the CME Group sees the fed funds rate rising from its current 0.25–0.50% to 2.50–2.75% by year-end. It would be the sharpest rise since 1994.

If this were to occur, and there’s no guarantee it will happen, we might see three 50 bp increases and three 25 bp increases at the remaining six meetings. Currently, the CME’s gauge is pricing in 50 bp increases at the May and June meetings.

The Fed’s goal

The Fed is using its tools to raise borrowing costs and cool an overheated economy that has helped push inflation to a 40-year high. The Fed hopes to slow strong consumer and business demand for products, bring them more in line with supply, and therefore, alleviate pricing pressures without a recession.

For savers, higher interest rates are welcome. For investors, it’s more problematic. You see, higher interest rates create competition and a stiffer headwind for stocks. Notably, we experienced some volatility in the wake of Brainard’s remarks last week.

But the economy is expanding, and an expanding economy helps fuel growth in corporate profits. The economy is just expanding at a slower pace than it was the first half of 2021.

If you have any questions or would like to discuss any other matters, please let me know.  

Clark S. Bellin, CIMA®, CPWA®, CEPA

President & Financial Advisor, Bellwether Wealth

402-476-8844 cbellin@bellww.com

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1 The Dow Jones Industrial Average is an unmanaged index of 30 major companies which cannot be invested into directly.  Past performance does not guarantee future results.

2 The NASDAQ Composite is an unmanaged index of companies which cannot be invested into directly.  Past performance does not guarantee future results.

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