Everyone at this point knows that the fed must raise interest rates, right? I have spoken with economists, analysts, advisors, CFO’s, CEOs, and bankers, the consensus from each of these professions says that in order to combat inflation the fed must raise rates and tighten money supply. Occasionally you get the voice of dissent, saying “but that will kill the markets,” or “we haven’t recovered enough for hawkish policy,” but overall, the financially savvy individual says, “they must raise rates to avoid catastrophe.” Now I do not disagree with the means to avoiding a “financial hurricane,”1 but I do wonder to what extent it can be avoided…
Dueling Voices:
Should the feds have ripped the band aide off in 2021? Should they rip it off now? Or should they continue this slow peel back of QT and rate hikes. The fed has said they are willing to do whatever is necessary but have been very ambiguous as to what that actually means. Some commentators said late last year, and early this year that the band aid should have been ripped clean to spare the agonizing pain of multiple rate hikes. The suggestion to give one big hike theoretically could have cutoff inflation, and over the longer term been better for markets, however that did not happen. At the time this should have happened, the Fed saw inflation as merely transitory, so the above wisdom did not seem to apply. Only after crossing threshold to act did inflation seem a bit heftier than the fed hoped. By the time, the first hike took place markets had fallen anywhere between 5 and 50 percent depending on the sector as investors speculated on the fed decision. So here we are now after two rate hikes and seemingly undeterred inflation. Will the fed pick up the game? …Probably. So far, they have shown willing attempts to compensate for their past mistakes, the question however, “is it too late?”
I wonder if the Federal Reserve looks at today’s inflation as the biggest concern or the impact an economic recession will have on American citizens. On the one hand you have those already living paycheck to paycheck, barely able to afford gas, groceries, and cool their house at night. Inflation to this group is horrible and gets worse every month in this same hand, there is the recently retired and about to retire group. They too face inflationary challenges as pension and retirement income fall behind the costs of living. Those in retirement in this group may have to go back to work part time or delay retirement a few more years to prevent running out of money in retirement. However, the group that takes the blunt of a fed decision are those in the middle of retirement. They will either lose their retirement funds to inflation and to a market correction.
As the Federal reserve makes their decisions, what do you think is the worst problem impacting the economy?
Problem: Fed Solution:
Paying for high gas, food, (Then the fed must hike
goods, etc… because of inflation? rates like no tomorrow)
Losing your job due (Then the fed needs should
to buisness cost cutting? continue the slow ineffective rate hikes)
Seeing our grandparents apply (Then the fed needs to
for work to get extra income? stop hiking rates.)
There is however a fourth choice, perhaps the hardest choice. 36% of workers making over $250,000 a year, 37% of workers between 200k and 250k per year, and 47% of workers making between 150k and 200k per year, live paycheck to paycheck. These groups represent the highest spenders in America, and they have the power to influence demand, fight inflation and help their country. However, it would require voluntarily building margin into their budgets and a movement to fight against the eat, drink, and be merry lifestyle in America.
If enough people can financially control their spending, prices will adjust, business will begin prioritizing goods and services that matter, and the heavily weighted bond portfolios of those in retirement may last for the retirees. The choice to stop living paycheck to paycheck provides stability to the markets, combats inflation, and individuals may find more fulfillment with a financial purpose serving others through budgeting. A great place to start would be looking over your spending and finding ways to cut back. A good next step would be to find a financial advisor who can help you set financial goals and help align your work, savings, spending, borrowing, and investing toward what you value most. Blacor Investments has provided Private Investment Advice since 1959, we offer investors investment advice and financial strategies that stem from three generations of investment professionals.
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