June 2022 – By Kyle Rohrwasser
Last month, Federal Reserve Chair Jerome Powell put any mention of a 75 basis point hike to bed, implying that they would not move too quickly. However, after the June 10th inflation report came in higher than expected (8.6%), the idea of a 50-point hike seemed like nowhere near enough. In a sign that the Fed is serious about fighting inflation, and willing to pivot quickly as the economic data changes, the Federal Reserve hiked the Federal Funds rate 75-basis points (0.75%). In addition, they also updated their estimates projecting a year-end Federal Funds rate of 3.4%, substantially higher than initial projections of 1.9% made in March.
As stated in the most recent announcement “The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge.” If inflation increases persist, we may see these estimates move higher which may have adverse effects on financial markets. The Federal Reserve has shown they will pivot and increase rake hikes at the expense of both the market and short/intermediate-term economic activity. As inflation numbers come out, we expect the Fed and financial markets to move in line with those announcements.
The Federal Reserve’s two objectives are full employment and price stability. It is a balancing act; price stability is what must currently be addressed as employment remains strong. This is being done with interest rate hikes/balance sheet reduction, which should lead to demand destruction. As demand slows and economic activity is reduced, we should see prices come in and inflation cool. The optimal outcome would be to do this without triggering a recession, commonly referred to as the ‘soft landing’. There has been a consensus that inflation will moderate in the second half of the year, hopefully this leads to more certainty on future expectations thus creating the bottoming of equity markets.
The war in Ukraine has continued to cause disruption in global oil markets. The main issue being global energy demand and lack of support for producing more. In recent years, there has been governmental shift to get energy more “Green” and create less dependence on fossil fuels. Additionally, investors have been seeking more conservative capital management from these energy companies. This has seen more money being returned to investors via dividends and buybacks, and less going towards new developments.
Now that the tide has shifted with nationwide averages near $5/gal, political action will most likely be taken. President Biden has proposed a national gas tax holiday that will put a temporary pause on the gas tax for a few months, although there are doubts if Congress will support the idea. Consumers would marginally benefit from the 18 cents a gallon they would save but it is unlikely to create any feelings of true relief. More drastic action would need to take place soon to increase production and reduce the cost for consumers. With the war in Ukraine dragging on, and new production requiring time to materialize, and capacity constraints within the refineries, high gas prices will likely stick around for now.
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