Inflation can be defined as a general increase in prices and a decrease in the purchase value of money. If left unchecked, inflation could hamper economic growth and lead to lower living standards for individuals. As it stands, inflationary pressures persist in the US economy, some proving to be less transitory than others. One of those lingering areas, according to CNBC, is energy prices, as Americans now pay the highest amount at the gas pump since October 2014. What’s more, the average price of a regular gallon of gasoline in the United States is currently 55%. higher than it was just a year ago. Other areas, such as accommodation and travel, are proving to be more transient and linked to the initial surge in demand following the economic reopening of the COVID-19 pandemic.
Whether or not inflation is transitory, inflation, on the whole, is on the rise. Consider that the Consumer Price Index (CPI), a widely recognized barometer of inflation, rose 6.2% year-on-year in October, marking the highest annual gain in 31 years! This record level of inflation presents challenges for economic recovery and has become a major concern for consumers across the country. This concern is evident in November’s reading of the University of Michigan’s Consumer Sentiment Index, which plunged to 66.8, its lowest level in a decade. The survey showed that consumers expect even higher inflation rates going forward, with the 12-month forecast rising to 4.9%.
With inflation so high and economic growth remaining so strong (for the moment), many investors are rightly wondering why the Federal Reserve (Fed) is not acting quickly to raise interest rates? To answer this question, we must first understand that the Fed currently believes that inflation will start to moderate in 2022. Second, we must place interest rates in the context of the comprehensive ‘TNT’ approach of the Federal Reserve to manage inflation, promote full employment, and help the economy fully recover from the COVID-19 pandemic.
· Taperitif – reduce their current bond purchases by around $ 120 billion per month. In early November, the Fed announced it would begin its phase-out plan later this month by buying $ 10 billion less in U.S. Treasuries and $ 5 billion less in mortgage-backed securities each month.
· NOTThe arrow – reduce the current size of their balance sheet by 8 trillion dollars + through the sale of bonds. Fed Chairman Powell has indicated that the Fed wants to initiate the Taper process first before considering reducing the Fed’s massive balance sheet size. Until that consideration, $ 105 billion per month in additional obligations (following the announcer in early Novembert) will continue to increase the size of the balance sheet until the reduction begins.
· Ttighten – raise the target Fed Funds rate from its current range of 0.00% to 0.25%. Although some on Wall Street have called for two rate hikes of 25bp (or 0.25%) each in 2022 and two more rates of 25bp each in 2023, we tend to agree with the most recent chart ” Dot Plot “(see below(FOMC outlook for the federal funds rate.
The Fed’s Dot Plot Chart
While it is clear from the chart above that we are heading towards a rising rate environment; interest rates are expected to remain at historically low levels for the foreseeable future. In addition, the rate hike should accompany the continued expansion of the US economy. Otherwise, the Fed would not consider raising interest rates.
Investors need not necessarily fear inflation or fear of rising interest rates during this economic recovery, but rather should plan and position their investment portfolio strategies accordingly, always keeping in mind their expectations. growth and / or income objectives, their investment schedule and their risk tolerance. For example, sectors of the market that have performed relatively well in previous periods of economic expansion, which may have coincided with rising rate environments, include, but are not limited to, U.S. and international equities, high yield bonds and certain higher quality bonds. like municipal bonds.
Inflation, interest rates and the Federal Reserve are just a few of the many moving and often confusing pieces of the capital markets puzzle. Therefore, at Hennion & Walsh, we recommend that investors work with experienced investment professionals to assess these moving elements and help them create and manage the asset classes within their investment portfolios. Happy Thanksgiving everyone!
Hennion & Walsh Asset Management currently has allocations under its managed money program, and Hennion & Walsh currently has allocations in certain SmartTrust® Unit Investment Trusts (UIT) compatible with several of the portfolio management ideas to consider mentioned above.
Past performance is no guarantee of future results. We have obtained this information from sources which we believe to be reliable and accurate. Hennion and Walsh cannot guarantee the accuracy of this information and cannot be held responsible. You cannot invest directly in an index. Diversification can help mitigate risk and volatility in your portfolio, but does not guarantee profit or guarantee against loss.