Federal Reserve and interest rates.
A hawkish mentality has entrenched itself amongst the powers that be at the Federal Reserve. The commentary from Fed Chair Jerome Powell and other Fed officials (i.e. continued big rate hikes to deal with inflation) may be laying it on a bit thick. In reality, they may be overselling their actual commitment to higher rates. Fed Chief James Bullard recently stated that he believed the markets “got the message” in reference to the recent selloff.
One issue with this mentality is that from all appearances the Federal Reserve seems intent on getting to a set level of rates quickly, before seeing the impact recent rate cuts have on bringing down inflation. This concern may start bubbling up if recent comments from Federal Reserve Bank of Chicago President Charles Evans are any indication.
There is typically a distinct lag from when rates increase to when they impact the economy. With three consecutive increases of .75% already, it may be time to begin wondering how those historically rapid increases will play out economically over the coming months. I do not believe the Fed will stop raising rates, but I do believe it would be prudent to moderate the size of subsequent increases to give officials time to evaluate more data on the economy.
Strong U.S. dollar.
One effect of the Fed’s early mover status on increasing rates, particularly at the magnitude they have, is the strengthening of the U.S. dollar relative to most all other currencies. As of today, the U.S. dollar to Euro has been bouncing around parity, with the British pound at $1.12 per pound. To say these moves are massive is an understatement. The strength of the U.S. dollar will provide some help in bringing down inflation here in the States. It will make it more difficult for other countries to do the same.
The state of worldwide currency markets is also indicative of the current flow of capital. Even with our economy and markets seemingly in turmoil, the U.S. is still the top place to be according to the flow of funds. Cash is flowing into the U.S. due to our higher rates on debt and relative stability economically.
Long term outlook.
In the long term, I am confident that the flow of capital to the U.S. and the stabilizing of inflation can provide a solid foundation for the next bull market. It is unlikely to occur in 2022 or even in the first half of 2023, but when it comes the U.S. investment markets should be in a good position to benefit from the next upward swing in the global economic cycle.