Boxing Gloves symbolizing The Markets and Fed

Don't Fight the Fed? The Markets Just Got a Reminder

BlogFinancial Commentary
February 20, 2023
By Samuel Richter
Securities Analyst

'Don’t fight the Fed' is an old investment saying Krista mentioned in last week’s commentary. The markets got a harsh reminder of this last week, as economic releases indicated higher-than-anticipated inflation and strong retail spending. 

Those numbers will likely add to the Federal Reserve's motivation to keep interest rates higher for longer.

Last Week's Numbers

The January Consumer Price Index (CPI) cooled less than anticipated. CPI rose 6.4% year-over-year, above the forecast of 6.2%. Core CPI, which excludes the often-volatile food and energy prices, rose 5.6% compared with a 5.5% forecast. While inflation moderated slightly from the December reading, the pace of disinflation slowed in the first month of 2023.

Meanwhile, retail spending was strong in January, increasing 3%. Sales from consumers dining out were especially strong, rising 7.2%. In addition, vehicle sales significantly rose, as used car prices are on the decline. The retail spending increase in January is the largest monthly gain in nearly two years. A positive sign for the consumer and U.S. economy — but not so much for inflation.

These data releases have caused a "change in heart" for the markets, which are starting to believe the Fed’s rate projections for this year. As you can see in the chart below, markets now expect the Federal Funds rate to end the year above 5%.

chart

As recently as a few weeks ago, in late January, the markets had been expecting the Fed to cut rates in the back half of the year to around 4.5%. Not anymore.

What does this mean for your portfolio?

The markets have started to take the ‘Don’t fight the Fed’ advice. A lot can change throughout the year, so the Federal Reserve’s rate projections and market expectations will continue to adjust. Therefore, heightened volatility will continue as the inflation battle drags on. Contact us today to discuss what higher interest rates mean for your portfolio.

About the Author

Samuel Richter

Samuel Richter is a Senior Securities Analyst within Security National's Wealth Management division. He began his career at SNB in 2020, after graduating with a degree in finance from Iowa State University.

Related Articles

How to Master the Psychology of Judgement in Investing April 22, 2024

Daniel Kahneman is best known for his work on behavior and the psychology of judgement in decision making. Kahneman and his colleague Amos Tversky’s research laid the foundation of behavioral economics/finance. Their research demonstrated people often make mental errors and have cognitive biases, this was contrary to most classical economic models at the time, which were based on a “rational being” to explain people’s economic decisions. The world of behavior finance continues to expand building on the foundation of Kahneman’s early research.

Spring Cleaning:  Time to Cultivate Your Financial Plan April 15, 2024

As the old adage goes, April showers bring May flowers. Depending on where you are from or walk of life, this proverb can take on many meanings. The way I interpret the classic saying is that April represents a time for preparation. A time to do some spring cleaning and tackle projects neglected during the winter months. For farmers, it means a return to long days in the fields. For accountants, it signifies the conclusion of an arduous three months of tax preparations. At Security National Wealth Management we feel now is a great opportunity to assess your financial plan and ensure you are on the right path to achieving retirement goals.
Look What's on the Verge of a Major 40,000 Milestone April 1, 2024

In early December 2020, my colleague, Michael List, published an article marking the Dow Jones Industrial Average hitting the 30,000 milestone. In that article, Michael describes four different methods that each provide us with an educated guess as to when the Dow would cross the 40,000 milestone, with guesses ranging from two to six years. Michael said that the 40,000 milestone probably would be here faster than we expect but that it ultimately would leave us with more questions, e.g., when would the Dow reach 50,000? And now, about 40 months later, or 3.33 years, the Dow is approaching 40,000, causing us to guess when it ‘turns’ 50,000. To continue our analysis, let’s use the same methods utilized by Michael to predict the arrival of the Dow at 50,000.