Last week the Federal Reserve hiked the fed funds rate by another 0.75% marking the sixth increase this year and the fourth consecutive three-quarter point increase. The fed funds target range, which in January was 0.00% - 0.25% now sits at 3.75% – 4.00%. The pace and size of these rate increases reflect the magnitude of the problem. Historically, the FOMC (Federal Open Market Committee) moves in smaller, one-quarter point increments, up or down as it tightens or loosens monetary policy. However, it has been unable to subdue inflation pressures which have proven to be more stubborn than a wet mule.
Companies, consumers, and investors alike wonder if we are finally approaching the end of the Fed’s tightening efforts, or if the light at the end of the tunnel is an oncoming inflation train. Month after month economists predicted we would soon reach peak inflation, only to have those forecasts dashed on the shores of repeated negative revelations. While it has leveled off, inflation has not yet reversed course, remaining stuck at elevated levels. How much longer it will stay uncomfortably high is yet to be seen and Chairman Powell said last week that the Federal Reserve is unwilling to take its foot off the brakes. The FOMC will meet again December 13-14 and the current consensus is that it will raise rates a more modest 0.50% assuming the lag effect from prior rate hikes becomes evident by then.
Peak inflation will not be sufficient to influence the Fed to alter its course because inflation must revert back toward the FOMC’s 2% target rate. The labor market is still tight with many more jobs available than people seeking employment resulting in continued wage pressures. However, the housing market is slowing and may be the 800-pound gorilla that finally pushes inflation momentum in the other direction. How long it takes to bring inflation back down to 2% is anyone’s guess. It reminds me of those long family trips years ago when as a child I sat impatiently on the back seat asking my mom and dad over and over, “Are we there, yet?” My loving and patient parents would calmly reply, “Not much longer, Sammy, not much longer.”
Let’s hope that proves to be the case this time.
Sam Taylor, CIMA®, AIF®, CRPC®