While we’re only a month into the New Year, it is estimated that around 30% of people that set a goal for themselves on January 1st have already given up on it. While some resolutions can be achieved quickly, most need more than a month to be successful. That is no different for the Federal Reserve, which has been the focus for much of 2022 and continues to be as we move through 2023. They have a laundry list of possible resolutions for this year, but three of the more important ones are highlighted below:
The Fed’s Resolutions for the 2023
1. Continue to curb inflation
2. Be able to pause interest rate hikes
3. Guide the economy to a soft landing
Continue to curb inflation
Typical monetary policy says that to drive down inflation the Fed needs to raise interest rates, but 2022 was anything but a typical year. Multi-decade highs in inflation combined with historically aggressive Fed rate hikes, slowing economic growth, and geopolitical unrest helped drive both stocks and bonds to double digit losses. Major equity benchmarks across the board declined in sync with the S&P 500, which posted its worst annual performance since 2008. Making matters worse, fixed income assets did not provide their standard stability. When stocks have a volatile year, bonds usually offer a place to hide and help offset losses in the equity market. Instead, the Bloomberg Aggregate Bond Index had its worst year since its introduction in 1976.
Towards the end of the year, data started to reflect progress towards the deflationary goal that the Fed is trying to achieve. The Consumer Price Index fell from a high of 9.1% in June to 6.5% in December. However, inflation remains much too high in an absolute sense and they still aren’t incredibly close to their stated 2% target. In order to keep combatting inflation, projections say they are likely to raise rates at least one more time in 2023 following their .25% raise on Wednesday, February 1.
Be able to pause interest rates hikes
In December, the Federal Reserve signaled that it expected the peak interest rate to be just 75 basis points higher than the rate at that time (50 basis points higher than the current level). That line could easily be reached within the first few months of 2023 and the Fed checking off its second resolution to end its rate hike campaign will remove a significant headwind from asset prices. However, if inflation remains high then they will need to stick to their guns and continue to tighten.
Guide the economy to a soft landing
Which brings us to their third resolution. Can the Fed avoid a deep and prolonged recession? While a recession of some kind is likely on the horizon – more probable this calendar year – it’s hard to tell whether or not the Fed will be able to guide the U.S. economy towards a “soft landing”. If they are too hawkish for too long, they could draw demand too far down, leading the economy into a longer recession.
Our Outlook: BEARISH
The economy is starting to slow, but inflation remains stubbornly high. The Fed meeting on February 1 confirmed the roadmap of continuing to raise and keep rates high to curb demand pressures. Given low unemployment, this likely means they will push the economy into some type of recession, resulting in job losses to help kill demand and bring prices back down. Caution and patience are warranted.
How Can We Help?
At GGM, aligning your investments with the prevailing economic environment is just one of the ways we strive to add value to your portfolio. If you are concerned about whether your investments are primed for the current market and allocated to meet your objectives, we recommend our complimentary portfolio checkup. Contact us today!