I’m baaaaack!

Getting v aggressive

The Federal Reserve released meeting minutes from their last meeting that indicated officials are prepared for multiple 0.5% increases to the interest rate in the next several months, moving their policy past “neutral” into “restrictive” territory. Basically, they’re not afraid to get aggressive to bring down inflation, but are also concerned about being so aggressive that it creates risks to financial stability across the economy.

Moral of the story: We started with policy interest rates near 0% at the beginning of the year and the market is expecting we’ll end the year closer to 2.5% – 2.75%, though it seems like the Fed might be willing to go even further. This change in the cost of debt is a big part of why markets have sold off in the last few weeks – higher interest rates mean that the value of a future dollar is lower today. The other issue that’s daunting markets is that the Fed’s aggressive policy is going to drive the economy into a recession.

What’s inflation again?

The Fed’s preferred inflation gauge – the core personal consumption expenditures price index – came in at a 4.9% annual rate for the month of April, a deceleration from where inflation stood in March. Separately we saw energy prices pull back slightly in April, but that has since reversed with gas prices jumping 11% in May. Despite the inflation, consumers continued to spend during April, with spending showing a pretty meaningful shift from goods (which was the primary driver of consumption during the pandemic) to services (which had been the primary driver of consumption pre-COVID) as spending at bars, restaurants, and travel came back in full-force with the warmer weather.

Moral of the story: Inflation has been rising at a pace we haven’t seen since the 1980s – what started with an undersupply caused by COVID has since evolved into a fully clogged supply chain exacerbated by the conflict in Ukraine pushing energy prices sky-high and causing concerns about food shortages. Inflation has been another reason why markets have sold off in the last few weeks – companies are facing meaningfully higher costs that are eating away at profits. However, this decelerating inflation provided a bit of optimism.


Consumer sentiment fell to 58.4 for the month, marking its lowest level in over a decade. Consumers are expecting inflation to remain well above 5% in the coming 12 months, and this inflation was top of mind. However, consumers still feel good about their personal financial situation, and their ability to improve that in the next five years.

Moral of the story: Consumers are still feeling good about their personal financial situation because the labor market is very strong. But as inflation continues to eat away at the wallet share, there is just fundamentally less money to spend on other things. Consumer spending accounts for about two thirds of our economy, so any slowdown here is bad news bears. While the labor market is still quite strong, the impact of plummeting stock prices coupled with higher costs has caused many large companies to reevaluate their hiring plans, which could start to create a more slack in the labor market. All these worries have been feeding into investor sentiment, driving the bear market we’ve seen in the last few weeks.  

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