Displaying items by tag: inflation

(Washington)

In a widely expected move yesterday, Jerome Powell announced the first hike of his stint as the head of the Fed. The move was a quarter point higher to between 1.75% and 2%. Powell promised to be more open and transparent about the Fed’s outlook than in former times. Powell presented the rosiest outlook on the US economy in memory, repeatedly expressing strong optimism. He indicated that there were two more hikes planned for this year.

FINSUM: All the optimism comes across as quite hawkish despite Powell’s intentions to seem gradual. We appear to be on definite course higher.

(Washington)

All eyes on the Fed. Not only is the winding down of the Fed’s balance sheet a potentially major issue to Dollar liquidity and emerging markets, but the market has rate worries to deal with. The big question is how low the US jobless rate can go before it sparks big inflation. Currently sitting at 3.8%, the Fed needs to decide how long it can tolerate the hot market before hiking rates quickly. The US jobless rate has only twice been so low. Once in the 1960s, which led to a decade of high inflation, and once in 2000, which was followed by a recession.

FINSUM: There is currently a big disconnect between the rate rises the market is pricing in versus what the Fed is forecasting. The market may lose that gamble very badly.

(New York)

One of the key story lines that has been driving global equities gains over the last year and a half is that economic growth has finally returned to all corners of the world. Yet just as that story was becoming very believable, it is starting to fade. Global benchmarks for measuring growth have fallen undeniably since January, especially in Europe, and inflation is cooling in developed economies, both signs that the boom in expansion might have come to an end. Everything from shipping costs to copper prices have fallen as demand has waned.

FINSUM: Are we headed towards a global recession? It is always hard to forecast, but it seems as though we may be.

(Washington)

In what could be could news for those worried about the Fed hiking us into a recession, one of the Fed’s top leaders has just come out with a very dovish tone. St. Louis Fed chief Bullard says the Fed needs to slow its pace of rate hikes to preserve its credibility. “Inflation expectations in the U.S. remain somewhat low, suggesting that further normalization may not be necessary to keep inflation near target”. He suggests that the best policy going forward may be to freeze hikes.

FINSUM: One of the things that has worried us about the Fed is that they seem to be viewing rate hikes as some sort of automatic pre-determined path towards normalization rather than basing it on actual inflation numbers.

(New York)

If anything is becoming clearer in financial markets, especially after yesterday, it is that rates and yields are bound to rise. Thus many might be worried about how to protect their clients from the changing market. Barron’s has some suggestions. The key is to hold a fixed income portfolio for several years, a minimum of six, and to make sure to reinvest proceeds in higher yielding bonds. To achieve the targeted five-year maturity sweet spot, consider Vanguard’s intermediate Treasury fund, while also mixing in some Treasury Inflation Protected Securities (TIPS) to provide further protection.

FINSUM: This seems like a good strategy for a long period of gradual rate hikes.