A Precarious Situation

Last month I wrote how the Federal Reserve is getting ready to cut its bond purchases (print less money) and start raising interest rates. I described this as a good thing since it means the economy is viewed as being strong enough to remove this support. At the moment this still seems to be the course the Fed is on, however, it has become increasingly complicated. The war in Ukraine is a human tragedy creating a more challenging global economic landscape, with Russia and Ukraine supplying much of the world’s energy and agriculture.

There is a wide range of opinions and potential outcomes regarding how the crisis in Ukraine will affect the economy. There are optimistic and pessimistic predictions, each able to make a decent argument to support their view in this time of uncertainty. A big factor is whether or not the Federal Reserve can navigate this crisis well. With inflation already at 40-year highs before Russia invaded Ukraine, it was clear they needed to do something, and many believe they have waited too long. It is hard to see how inflation won’t remain elevated in the short-run with spiking energy and food prices.

The goal of the Federal Reserve will be to bring down inflation without sending the economy into a recession. By many measures the economy is strong, with unemployment near historic lows and strong demand for goods. However, inflation and higher interest rates result in less purchasing power for consumers as the cost of goods, services, and borrowing go up. If demand slows too much it can stall growth and cause stagflation (slowing economic growth, rising unemployment and high inflation), not seen since the 1970-80’s. Treasury Secretary Janet Yellen said last week that she expects a “soft landing” for the U.S. economy, not a recession, time will tell.

The economy and markets are in a precarious position, they will make it through this situation one way or another, they always do, the question is how rocky the ride will be. The tailwinds we’ve experience over the last decade or so could become headwinds. The question investors need to be asking themselves is, do you have an investment strategy to deal with inflation, and enough runway built into your financial plan to weather these potential storms?

If you would like to evaluate the runway in your financial plan or investment strategy, feel free to reach out at advisor@blakegallion.com.