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Is the Federal Reserve Behind?

By Jeffrey D. Coil, Fixed Income Portfolio Manager, October 04, 2018

The Federal Reserve voted unanimously to raise their benchmark fed-funds rate to a range between 2-2.25%.   But what does this really mean, is the Fed slowing growth and the prospect of future inflation?   In our estimation, the answer is almost certainly “NO.”  There are too many structural forces at work for inflation to slow near term, below are the highlights:

  • Per Goldman Sachs, the budget deficit will increase from a current $825B to $1,250B in 2021, a shocking yet inflationary expansion of fiscal policy.
  • Consumers are not feeling the squeeze of higher interest rates.  Mortgage rates have risen only slightly and at 4.65%, this 30-year rate will not curtail prospective buyers. 
  • Five year auto loans rates are lower than in 2011 and credit card companies are easing credit and offering zero percent financing, as overall consumer rates have been kept in check by competition and technological innovation. 
  • The unemployment rate is currently 3.9%, contributing to solid demand for workers. That strong demand for labor has led to an impressive 3% year-over-year (YOY) wage increase.
  • Full year GDP growth is estimated at over 3%, inflation is running at the top of the Fed’s range, corporate profits are booming and stock markets are at all time highs.

The above factors all point to prospects of higher inflation, which is a difficult animal to tame when it begins to accelerate.  The markets expect stability around overall prices within an economy and when that does not occur, volatility in markets can ensue.  Risks are increasing that the Fed is behind the curve and may have to accelerate rate hikes faster than the market is anticipating.

If we may be of assistance, or you have any questions, please contact us at .(JavaScript must be enabled to view this email address).

Information in this article was believed current as of the date of publication. As you know, changes occur frequently. The information presented is of a general educational nature. Before applying to your specific circumstances, please contact us at vision@umbaugh.com.


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