By J. Keith Buchanan, Portfolio Manager – GLOBALT Investments
November 30th, 2021, the Federal Reserve Chairman Jerome Powell told Congress that “transitory” should be retired as a description of inflationary pressures. Since that day, Fed funds futures have gone from pricing in 59 basis points to 277 basis points of Fed tightening in this calendar year. Financial conditions have tightened, which is the intended consequence of restrictive monetary policy, and they did so months before the first actual rate hike in March.
Given the FOMC’s dual mandate of stable prices and full employment, one could reasonably accept a buoyant labor market fueled by strong economic growth as breathing room for the central bank to attack inflation before it became further entrenched. At least, this was the case just a few months ago. Today, the Federal Reserve has an even more complex dilemma on its hands. The two charts below show the manifestation of the problem itself.
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Last September, just before the FOMC embarked on this journey to restrictive monetary policy, 2022 inflation expectations were 2.45% while the market expected real GDP growth at 4.3% enough cushion for a restrictive policy shift to throw cold water on inflation embers (yes, financial market media referred to inflation as “embers” back then) without recessionary or stagflationary worries seeping into the picture. However, the story has changed materially in the past eight months. Inflation expectations increased to 4.6% for 2022 while real growth expectations for the same period moved lower to 2.7%.
In fairness, there is reflexivity involved to some degree. As inflation expectations spread and interest rates move higher as a result, there is some level of crowding out that occurs at the expense of real growth. Moreover, the market is doing some of the heavy lifting for the Fed. Tightening financial conditions result in demand destruction which puts downward pressure on prices. In our opinion, the Fed’s hawkish rhetoric has possibly done more to create an environment more corrosive to inflationary pressure than the two recent rate hikes given the lagged effect of monetary policy shifts.
Nonetheless, the breathing room that the market perceived to be at the behest of the Federal Reserve last fall has all but vanished while inflation poses a larger problem than it has in a generation. We think that notion has been replaced with broad and growing skepticism of the Fed’s ability to execute the coveted soft landing and avoid a recession, and threading the proverbial needle seems more daunting by the day.
GLOBALT is an SEC Registered Investment Adviser since 1991 and, effective July 10, 2013, remains a Registered Investment Adviser through a separately identifiable division of Synovus Trust N.A., a nationally chartered trust company. This information has been prepared for educational purposes only, as general information and should not be considered a solicitation for the purchase or sale of any security. This does not constitute legal or professional advice, and is not tailored to the investment needs of any specific investor. Registration of an investment adviser does not imply any certain level of skill or training. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information may be required to make informed investment decisions, based on your individual investment objectives and suitability specifications. Investors should seek tailored advice and should understand that statements regarding future prospects of the financial market may not be realized, as past performance does not guarantee and/or is not indicative of future results. Content may not be reproduced, distributed, or transmitted in whole or in part by any means without written permission from GLOBALT. Regarding permission, as well as to receive a copy of GLOBALT’s Form ADV Part 2 and Part 3, contact GLOBALT’s Chief Compliance Officer, 3400 Overton Park Drive, Suite 200, Atlanta GA 30339. You can obtain more information about GLOBALT Investments and its advisers via the Internet at adviserinfo.sec.gov, sponsored by the U.S. Securities and Exchange Commission.
The opinions and some comments contained herein reflect the judgment of the author, as of the date noted.
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