By Bryce Johnson, Principal, Risemint Capital Advisors The FOMC minutes yesterday revealed that Powell may be benefiting from an old fashioned case of serendipity. But is Powell and the rest of the committee properly weighting the resulting confluence of lowering inflation with a thriving job market? I think that is the “soft landing” that he was striving for, no?
It seems that the goal to bring the CPI down to 2% supersedes all other economic metrics when it comes to the committee’s decision to continue its contractionary policy. With June’s tape reading a 4% CPI, the Fed indicated in yesterday’s report that we should expect another increase inJuly and potentially one or two more for the remainder of 2023. If we are to assume .25% increases, that portends an effective fed funds rate of between 6.0%%-6.25%, which is roughly a 15 percent increase from today.
In March of this year we saw just how scattered banks’ balance sheets are managed. It was revealed that banks don’t manage interest rate risk ubiquitously to one another. Just take for example the range of savings rates: according to the FDIC, the average savings account averages a .50% annual yield. Meanwhile, the average money market return is around 4.50%.
I can’t predict what will happen in the future with certainty, but perhaps we can assign an over/under on whether the following rate increases will exacerbate the stress on the US financial system, which usually affects the periphery of the broader economy.
What concerns me, and I doubt I am alone with this, is that the Fed has already showcased its inability to not only control inflation from approaching double digits in a very short time period, but also its lack of predicting the trajectory of where inflation would be by the end of 2022. I am wondering why we should expect them to throw the kitchen sink at accomplishing an extraordinarily precise inflation target, that is just 2% lower than where we are today? I can’t help but consider their proposition to be very high risk for quite a marginal return.
In any event, as Risemint’s portfolio strategist, I construct our client portfolios with these considerations in mind. And when conditions change I stand ready with my team to make changes where necessary.