Much has been made of the Federal Reserve Bank’s fight against inflation. Initially thinking that inflation was “transitory,” the Fed was late in raising interest rates (their main tool to rein in inflation). For most of the previous 15 years, the Fed rate was at 0%. When they began bumping it up, they didn’t stop until the rate was well over 5.0% —one of the most dramatic rate increases in history.

So economic conditions are much tighter now, right?

As financial advisors, we are always looking for good sources of information on the current economic environment and different financial insights. One of our many resources, First Trust, recently wrote an article “Is the Fed Tight, or Not?” that we wanted to share with you. First Trust, an investment firm that has been around since 1991, is very data driven, has some great analysts, and has an investment philosophy that is similar to our own.

Their answer: Maybe not. We tend to agree.

Typically, when rates increase this much, economic growth (GDP) is falling and unemployment rises. Neither has happened thus far. GDP is still growing at the long-term average, although the prior six quarters saw much faster growth . Unemployment has barely changed, and it continues to be well below 4.0%. As the article states, “In other words, we haven’t yet had an economic slump consistent with tight money.”

They note that inflation had fallen from 9.0% in mid-2022 to 3.1% in mid-2023. But after that initial improvement, inflation has not declined any further towards the Fed’s goal of 2%. In fact, data shows that inflation has actually been rising in recent months.

First Trust goes on to say that, “one of the reasons we haven’t yet experienced economic turbulence is that monetary policy hasn’t been as tight as most investors thought. If so, it could take much longer to bring inflation down to the 2% target.”

After their commentary was written, additional reports came out indicating that inflation may be stickier than many thought. This has disappointed many who expected several rate reductions this year. Now there is significant concern that rates may not be reduced at all, sobering news for stock and bond markets that have anticipated rate cuts.

Let us help you through this challenging economic environment.

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