Market Update – June 15, 2022

Thoughts on Today’s 0.75% Rate Hike:

Today’s 75 basis point increase in target interest rates provides us proof that the Federal Reserve is quite serious about resolving the inflation conundrum.  The FOMC is now moving with great rapidity and are projecting that through their front-loaded actions they will be able to affect the pace of demand in the overall economy.  The central bank has decided that a higher level of unemployment will be necessary to reduce consumption.  Even though job growth remains robust, one could envision a somewhat slower pace of job gains over the second half of 2022.  These actions coupled with the eventual reopening of supply chains in China should reduce price pressures for goods and services and bring demand better in line with economic potential.

Following today’s large interest rate increase (the largest since 1994), and with continuing interest rate increases, I expect that GDP will begin to slow somewhat as we progress through the end of 2022 and into 2023.  As the Fed is essentially targeting lower GDP, we should expect that stocks that rely on high growth may continue to struggle as we move through this challenging period.  I reiterate the importance of maintaining a conservative posture while these uncertainties work themselves out.

The only recipe for lowering inflation is to bring demand back in line with supply.  If supply chains are permanently to be lowered the economy will require a lower level of long-term demand to offset the inflationary process.  Although I do not expect longer term supply chains to be meaningfully impacted, one could argue that a protracted Ukraine War could materially impact supply of commodities into 2023 – and this could impact prices well into next year.

One Final Note:

High inflation, the kind of which we have been witnessing lately, is detrimental to the health of the global economy.  It is the ultimate wealth tax as it erodes purchasing power and harms those who can least afford it.  It is imperative for the central banks to resolve this matter.  Today’s actions and further actions by global authorities will ensure that inflation will be materially lower as we enter 2023.  Nothing can be more conducive for higher stock prices than low and stable long-term inflation.  After today’s actions I expect that by the end of 2022 we will be much closer to the end of the Fed rate hiking cycle as they bring interest rates in line with levels that can help reduce the level of inflation.  And lowering the pace of inflation is the best elixir for today’s market uncertainty.

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