Category Archives: Economy

Interest Rates, Cost of Capital and Recession

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Interest rates are often called the price of money. They determine how expensive capital is to access for companies, but also for individuals and even governments. ~ Jonathan Schramm

The Federal Reserve controls what is called the federal funds rate, which is the rate banks pay to borrow from other banks. Other interest rates throughout the system are based on that rate.

When an economy is in recession or unemployment is high, the Fed lowers rates. This is meant to encourage investment and spending, pushing more money into the economy.

Inflation is a sign there is too much money in the financial system and economy. One way to reduce the monetary supply is to give people and businesses an incentive to take on less debt. A good way to do that is to raise rates. And this is just what the Federal Reserve is doing.

Interest rates affect stocks in two main ways: the impact companies’ bottom line and impact investor’s behavior.

Many companies “roll over” their debt. This means they never really pay their debt, just pay the interest and renew their old bonds with new ones. In this case, rising rates mean the new bonds will cost the company a lot more in interest expenses going forward.

Some companies are also highly reliant on cheap debt to keep afloat or grow. Others rely on customers spending on credit cards. These companies’ profits might suffer in an environment of rising rates.

This is why a rising rate environment favors skilled stock pickers. A solid balance sheet, low debt, cheap valuation, or high profitability will be very valuable in an environment of rising rates.

Higher interest rates are a disincentive for investors to plow borrowed money into asset markets. That’s one of the main reasons why stocks, cryptocurrencies, and other assets crashed in 2022.

Rising rates for borrowed money tends to cause capital flow out of markets, depressing the values of even quality companies. That hurts investors who bought at the top, especially if they bought at the top with borrowed money. For others it creates a valuable entry point.

Overall, rising interests rates and tightening the money supply are a useful tool to help bring inflation under control. But the recent interest rate increase might not have been enough and there’s probably more to come. If inflation stays high, we would need rates continue to rise to curb inflation.

The positive aspects for US investors:

  • Rising rates support a stronger dollar.
  • A strong dollar makes US imports cheaper.
  • A strong dollar support consumers’ spending by decreasing import costs.
  • Rising rates might help to keep inflation under control.

The negative aspects for US investors:

  • Currency devaluation can hurt overseas investments measured in USD.
    Overindebted companies and consumers might not be able to manage higher rates.
  • Rising rates decrease demand for big-ticket items like homes and vehicles.
  • Rising rates increase the risk of a recession.
  • Rising rates make US exporters less competitive.
  • Rising rates restrict the use of borrowed money by investors, decreasing demand for assets across the board.vehicles.
  • Rising rates increase the risk of a recession.
  • Rising rates make US exporters less competitive.
  • Rising rates restrict the use of borrowed money by investors, decreasing demand for assets across the board.

References:

  1. https://finmasters.com/rising-interest-rates-effects/

Inflation is Bad

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Inflation is an economic term used to describe rising prices and a loss of purchasing power over time.

Written by Geoff Williams for Forbes Advisor

Inflation is an economic term used to describe rising prices of goods and services, and a loss of purchasing power over time. It occurs when consumers spend more on the same amount of goods and services today than they did a year ago, writes Geoff Williams, a contributor for Forbes Advisor. It is typically expressed as the annual change in prices for everyday goods and services such as food, apparel, transportation and toys.

When everybody pays more and gets less for it, it can have some profoundly devastating effects on the economy—and some consumers get hurt more than others.

“In every economic environment, there are winners and losers and inflation is no exception.  However, the longer high inflation persists, the harder it is to find winners,” says Jeanette Garretty, chief economist at Robertson Stephens, a wealth management firm. “Ultimately, high inflation seeps into the nooks and crannies of every balance sheet and income statement.”

There are three primary types of inflation:

  • Demand-pull inflation
  • Cost-push inflation
  • Built-in inflation

Right now, the country is dealing with all three major types of inflation, which is rare, according to Christopher Blake, assistant professor of economics at Oxford College of Emory University.

Demand-Pull Inflation – Demand-pull inflation describes how demand for goods and services can drive up their prices. If something is in short or disrupted supply, you can generally get people to pay more for it.

The U.S. is experiencing demand-pull inflation due to wages rising and Americans having a decent amount of money in their savings accounts, Blake explains, although some consumers are starting to empty those accounts.

“Consumer spending has remained high, despite the rising prices we currently see,” Blake says. “This is commonly referred to as demand-pull inflation, as consumer demand pulls prices higher because firms cannot keep up.”

Cost-Push Inflation – Cost-push inflation often kicks in when demand-pull inflation is going strong. When raw materials costs increase for businesses, the businesses in turn must raise their prices, regardless of demand.

“Increases to the prices that producers face put businesses in a tough spot,” Blake says. “They can either accept higher costs and keep their prices the same, or they can respond by trying to keep their profit margins the same.”

When the price of chicken keeps going up, for example, eventually your favorite restaurant will need to charge more for a chicken sandwich.

Built-in Inflation – As demand-pull inflation and cost-push inflation occur, employees may start asking employers for a raise. If employers don’t keep their wages competitive, they could end up with a labor shortage.

If a business raises workers’ wages or salaries and tries to maintain profit margins by raising prices, that’s built-in inflation.

Now, if you learn about your favorite coffeehouse raising prices due to the climbing cost of coffee beans, you’re a victim of cost-push inflation.

And if you’re going to buy that coffee even though the price is uncomfortably high, you’re engaging in demand-pull inflation.

3 Ways Inflation Hurts Consumers and the Economy

1. Less Purchasing Power

The most obvious impact of inflation is that it hurts your purchasing power. If you can’t buy as many goods and services as you did before inflation, your quality of living will eventually diminish.

Less purchasing power really hurts families that were already experiencing financial hardship. “Think more money spent on groceries and gasoline, and less spent on travel and entertainment,” says Angelo DeCandia, a professor of business at Touro University.

“Inflation hits the lowest-income families harder because items such as gasoline and food make up a much larger portion of their budgets, leaving less for discretionary spending,” says Dan North, senior economist at trade credit insurer Allianz Trade. “So, for example, where they used to have money to go out to dinner, even fast food, or [go to the] the movies once a month, now they won’t at all.”

A 2021 study from the University of Pennsylvania found that lower-income households had to spend about 7% more on goods and services last year compared to 2019 or 2020, while higher-income households had to spend 6% more. Remember, the annual rate of inflation for 2021 was 4.7%.

2. Less Savings

If rising prices for essentials is eating into your budget more than normal, you probably aren’t putting as much money into a savings account. A June 2022 Forbes Advisor-Ipsos survey found that 42% of respondents were saving less money than usual.

“Inflation makes all of our income and savings less valuable,” says Todd Steen, professor of economics at Hope College in Holland, Michigan.

If you’re not able to save as much as you used to, you may be less prepared for financial emergencies, forcing you to rely on costly credit cards or loans to pay unexpected bills.

And even if you have money in savings already, that decreased purchasing power means your emergency fund might not stretch enough to cover a financial crisis during an inflationary period.

If you have $1,000 socked away for a rainy day, you’re certainly better off than not having it. But here’s an example of how inflation can eat at the value of your savings.

Car repair prices went up 9% from June 2021 to June 2022 according to the CPI. If you had a $900 car repair in June 2021, in June 2022, that same car repair would have been $981. Suddenly your $1,000 saved up is a little less valuable.

“Inflation is a difficult problem to get rid of in an economy, because when prices increase, workers want to have higher wages and salaries to keep up,” he says. “This can lead to future price increases, and the cycle continues.”

3. Loss of Goods and Services

Some industries do pretty well during inflationary times, particularly ones in which you can’t hold off your spending indefinitely, like supermarkets, gas stations and funerals—but some businesses are completely devastated.

That’s because when inflation runs rampant, consumers spend their money on products and services that they absolutely need, and hold back on what they don’t.

You’re going to get your car repaired if you need it. You’ll keep spending money on food.

But you might not take your kids to a trampoline park. You might instead opt for a free city playground with the youngsters, instead. Decisions like that are understandable when prices are high but collectively, they can damage segments of the economy.

“That could mean your favorite pizza place closes, or your nail salon drops a service because it’s become too costly,” says Callie Cox, an investment analyst at eToro.

The renown economist Milton Friedman quipped that inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced
only by a more rapid increase in the quantity of money supply than in output of goods and services. Consequently, empirical evidence suggest that, if growth in the money supply is greater than the actual growth in GDP, inflation results.

References:

  1. https://www.forbes.com/advisor/personal-finance/why-is-inflation-bad/
  2. https://www.nytimes.com/article/inflation-definition.html
  3. https://www.forbes.com/advisor/personal-finance/types-of-inflation/
  4. https://www.caixabankresearch.com/en/economics-markets/inflation/inflation-merely-monetary-phenomenon

Focus, Discipline and Patience are Wealth Building Super Powers!

Are American Consumers in a Recession?

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Over the past few months, supply-chain headwinds, inflationary pressures, inverted U.S. Treasury bond yield curve, and rising interest rates has added friction to the U.S. economy and to business operations across industries.

Consequently, investors have become extremely pessimistic about the economic outlook and stock market sentiment, which both are expected to witness a downturn in 2023 amid the impending prospects of a recession.

Per JPMorgan Chase, rising interest rates, record decades high inflation, geopolitical pressure and other factors could lead to a recession that will likely wash away the benefits of savings and the massive government aid received during the pandemic. Moreover, the job market is expected to downshift significantly and unemployment is projected to increase next year as the economy weakens.

A growing number of companies are opting to leave jobs vacant when employees leave or announcing hiring freezes. Widespread layoffs so far have been limited to the handful of industries hammered by rising interest rates, such as technology, housing and finance, say Mark Zandi, chief economist of Moody’s Analytics, and Jim McCoy, senior vice president of talent solutions for ManpowerGroup, a staffing firm.

The Federal Reserve, by increasing its benchmark interest rate to counter inflation, has raised the possibility of a downturn next year. Some experts believe that the Federal Reserve’s bid to contain inflation by increasing interest rate and tightening the money supply will likely achieve its target but put pressure on the consumer’s wallet and potentially trigger a recession in 2023.

Fifty-seven percent of the National Association for Business Economics (NABE) economists see more than a 50% chance of recession next year, according to the results of a new survey published by NABE. The survey pointed to the Federal Reserve’s continued raising the federal funds rate and tightening of monetary policy in an effort to tame inflation as the biggest challenge facing the economy.

Additionally, Gregory Daco, chief economist of EY-Parthenon, expects a recession to hit by the first half of 2023 as hiring slows and layoffs spread across industries, leading to net job losses for the year. He expects the economy to grow just 0.3% for the full year and unemployment to peak at 5.5%.

Many Americans believe that the U.S. economy and the global economy are already in a recession. However, with consistently strong job growth, historically low unemployment and solid growth in consumer spending, that doesn’t sound like a recession most people would remember.

But, a recession is in the eyes of the beholders. Essentially, “It depends on who you ask,” says Capital Group economist Jared Franz. “With food, energy and shelter prices all rising faster than wages, the average American consumer would probably say yes. In my view, we are either on the edge of a recession or we are already tipping into it.”

To put things in perspective, over the past 70 years the average U.S. recession has lasted about 10 months and resulted in a GDP decline of 2.5%. In Franz’s estimation, the next one may be worse than average, if current trends persist, but still less severe than the Great Recession from December 2007 to June 2009.

Key economic indicators point to a potential recession

Sources: Capital Group, Bureau of Economic Analysis, National Bureau of Economic Research, U.S. Department of Commerce.

The official arbiter of U.S. recessions, the National Bureau of Economic Research (NBER) considers many factors beyond GDP, including employment levels, household income and industrial production. Since NBER usually doesn’t reveal its findings until six to nine months after a recession has started, we may not get an official announcement of an economic recession until next year.

“It’s fair to say that most consumers probably don’t care what NBER thinks,” says Capital Group economist Jared Franz. “They see inflation above 9%, sharply higher energy prices and declining home sales. They feel the impact of those data points. The labor market is one of the only data points that isn’t signaling a recession right now.”

References:

  1. https://www.cnbc.com/2022/12/06/recession-walmart-jpmorgan-gm-ceos-talk-about-possible-slowdown.html
  2. https://www.msn.com/en-us/money/markets/is-a-2023-recession-coming-job-growth-likely-to-slow-sharply-companies-brace-for-impact/ar-AA159tMa
  3. https://www.foxbusiness.com/economy/labor-market-may-skirt-us-recession-nabe
  4. https://www.capitalgroup.com/advisor/insights/articles/is-us-already-in-recession.html

Producer Price Index (PPI)

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The Producer Price Index (PPI) came in higher than expected:

  • Expectations: 7.2%
  • Actual: 7.4%

Producer Price Index (PPI) came in above estimates on both headline (7.4% vs 7.2% estimate) and core (6.2% vs 5.9% estimate), comments Liz Young, Chief Investment Officer, SoFi. The Producer Price Index measures inflation at the wholesale level, which acts as kind of a leading indicator.

Inflation remains high, but is trending down, because the main driver of inflation is not interest rates. Instead, the main driver of inflation is excessive fiscal deficit spending and loose monetary policy.

Although, PPI is still falling moderately on a year-over-year basis, but any future upside surprises don’t bode well for upcoming Consumer Price Index (CPI) numbers which will be released next week.

The Producer Price Index (PPI) measures the change in the price of goods sold by manufacturers. It is a leading indicator of consumer price inflation, which accounts for the majority of overall inflation.

Best Investment Advice by Brian Feroldi

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  1. Don’t sell too early. Let your winner run and experience the magic compound growth over the long term.
  2. Capital is precious and limited, buy high-quality, avoid garbage. Doing nothing is almost always the best investing strategy and tactic. Valuing and researching great companies is also extremely important.
  3. Sometimes, the best stock you can buy is the one you already own. Add to your winners and not your losers. Winners tend to keep on winning.
  4. Your biggest edges as a retail investor are focus, discipline and patience, don’t waste it.
  5. Get comfortable doing nothing. Doing nothing is almost always the best investing strategy and tactic. It’s really hard to get comfortable doing nothing, but you have to get comfortable doing nothing. Valuing and researching great companies is also extremely important.
  6. Know what metrics to look at, and when to look at them, and when to ignore them. Study the business cycle. Know what valuation metrics matter, when they matter and when they don’t.
  7. Personal finances come first. Make sure you have an emergency fund, because life happens.
  8. You’re going to be wrong a lot. Get comfortable with that. If you buy ten stocks, six will be losers, three will be market beaters and one will perform extraordinarily.
  9. Find an investing buddy, or rather don’t invest alone. Get involved in a good community of investors. Find like-minded people. The Internet makes that so much easier.
  10. Watch the business and not the market price of the stock. What really matter in the long-term is the company’s fundamentals.

References:

  1. https://www.fool.com/investing/2021/03/20/top-10-investing-lessons-for-our-younger-selves/

The Impact of Increasing Interest Rates on the Economy and Investing

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The Federal Reserve Bank (Fed) implements monetary policy that has a broad impact on the US economy. One of the ways the Fed impacts its dual mandate of managing unemployment and inflation is to periodically raise or lower interest rates.

The Federal Reserve in November 2022 raised interest rates by three-quarters of a percentage point — or 75 basis points — for the fourth time in the calendar year, bringing its key benchmark borrowing rate that rules all other interest rates in the economy up to a target range of 3.75-5 percent, where it hasn’t been since early 2008, according to a Bankrate.

The fed funds rate matters because it has ripple effects on every aspect of consumers’ financial lives, from how much they’re charged to borrow to how much they earn in interest when they save. And, changing interest rates is one of the main tools that the Fed can use to cool down inflation.  

Inflation is the increase in the prices of goods and services over time and occurs when the demand for those goods and services exceeds supply. Inflation also represents a loss of purchasing power.

Typically, the Fed raises interest rates in times of economic expansion and does so to prevent the economy from overheating. The opposite is true when interest rates are cut, which typically occurs when the economy is in a down trend. 

To raise interest rates, the Fed changes the overnight rates at which it lends money to banks. That sets off a chain reaction that impacts the rates banks charge to businesses and individuals. When rates rise, the impact on the economy includes:

  • Borrowing costs rise for businesses, which can reduce investments in new plants, equipment, marketing, and physical expansion.
  • Borrowing costs rise for consumers, which reduces consumer spending, home buying, and investing.
  • Savings accounts and other low-risk investments earn more interest, making investing in low-risk instruments more attractive.

Markets adjust, with fixed income securities generally reducing in value and equities reacting in a mixed fashion depending on how much a rate rise is expected to affect specific types of businesses.

The U.S. Interest Rate Historical Timeline

The chart below shows the history of Fed Funds Rates going back to 1954.

The U.S. Interest Rate Historical Timeline The chart below shows the history of Fed Funds Rates going back to 1954.

Chart of Fed Funds Rate (Macrotrends)

Rising interest rates impact investing in several ways, some of which are fundamental and some of which are perceptual.

Adding to the dilemma for many investors is the inflation outlook and the question of how transitory or persistent that inflation will be. From a rate perspective alone, rising rates can be expected to have the following impact:

  • Prices of bonds and other fixed-income investments will weaken with rising rates, especially the longer-term instruments.
  • Rates offered on new bonds will rise, making them somewhat more competitive with equities.
  • Rates should rise in bank products such as CDs, bringing them back on the radar for investors.
  • When rates rise, stocks tend to fall — when rates fall, stocks rise.

Equity market reactions will be mixed, depending on the effects of higher rates on different companies and industries. Companies that are more leveraged will incur higher costs. Companies with high-ticket products that rely on consumer credit may weaken. On the whole, rising rates should also dampen enthusiasm to speculate, given higher borrowing costs.

“When interest rates are low, companies can assume debt at a low cost, which they may use to add team members or expand into new ventures,” says Brenton Harrison, CFP® professional based in Nashville, TN. “When rates rise, it’s harder for companies to borrow and more costly to manage what debt they already have, which impacts their ability to grow,” he adds. These higher costs may result in lower revenues, thus negatively impacting the value of the company.

Also keep in mind that as rates fall on savings accounts and certificates of deposit, investors generally seek out higher paying investments like stocks and are generally seen as a catalyst for growth in the market; in a rising rate environment investors tend to shift away from stock to places with less risk and safer returns. 

The specter of rising rates can also change the behavior of investors, many of whom may decide to put off purchases on credit or sell stocks that were purchased on margin, based more on their expectations than on near-term reality.

“Central banks tend to focus on fighting the last war,” says Scott Sumner, monetary policy chair at George Mason University’s Mercatus Center. “If you have a lot of inflation, you get a more hawkish stance. If you’ve undershot your inflation target, then the Fed thinks, ‘Well, maybe we should’ve been more expansionary.’”

References:

  1. https://seekingalpha.com/article/4503025-federal-reserve-interest-rate-history
  2. https://www.bankrate.com/banking/federal-reserve/history-of-federal-funds-rate/
  3. https://www.businessinsider.com/personal-finance/how-do-interest-rates-affect-the-stock-market

Inflation: Core Consumer Price Index

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Inflation is measure of the increase in the cost of living which can erode the value of your money, and more importantly – the goods, services, rent and mortgages that you can purchase with that money.

The U.S. Bureau of Labor Statistics showed that falling gasoline prices helped lead to a second consecutive lower annual U.S. inflation reading, but the consumer price index still edged up by 0.1% in August, contrary to the 0.1% drop expected by economists polled by The Wall Street Journal, writes MarketWatch. The core Consumer Price Index (CPI), which strips out food and energy prices rose by a much sharper 0.6%.

The year-over-year food index component of the CPI was up 11.4% in August. Higher food prices “reflect very tight global supply/demand dynamics,” says Jake Hanley, managing director and senior portfolio strategist at Teucrium. Rising costs don’t impact all households the same way. Some families may have a personal inflation rate that’s lower (or higher) than the national average, depending on what they buy.

Rising costs don’t impact all households the same way. Some families may have a personal inflation rate that’s lower (or higher) than the national average, depending on what they buy.

“Fuel prices have continued to be a major component in inflation figures, but while gasoline prices have cooled considerably over the last 3 months, diesel prices have remained fairly elevated,” says Patrick De Haan, head of petroleum analysis at GasBuddy. Diesel prices are a “major component of inflation in other areas of the economy, such as the cost of groceries.”

“Fuel prices have continued to be a major component in inflation figures, but while gasoline prices have cooled considerably over the last 3 months, diesel prices have remained fairly elevated,” says Patrick De Haan, head of petroleum analysis at GasBuddy. Diesel prices are a “major component of inflation in other areas of the economy, such as the cost of groceries.”

“Fuel prices have continued to be a major component in inflation figures, but while gasoline prices have cooled considerably over the last 3 months, diesel prices have remained fairly elevated.” — Patrick De Haan, GasBuddy

Diesel and natural-gas prices have remained high, despite a retreat in recent weeks, and fuel costs are a key component when it comes to growing the food the nation needs. Diesel engines power about 75% of U.S. farm equipment and transport 90% of farm products, according to data from the Diesel Technology Forum. 

Diesel “will likely remain at historical premiums to gasoline—and could see more disconnect if this winter is cold due to diesel and heating oil being essentially the same product, keeping demand elevated,” De Haan says.

Wall Street economists see the U.S. Federal Reserve lifting interest rates higher than they previously expected following the latest U.S. consumer price inflation data. Economists at TD Securities said they now expect the Fed to raise its benchmark rate by 75 basis points next week.

References:

  1. https://www.marketwatch.com/story/high-fuel-costs-will-continue-to-contribute-to-the-rise-in-food-costs-11663100705
  2. https://www.marketwatch.com/story/the-biggest-fed-rate-hike-in-40-years-it-might-be-coming-11663097227

US inflation cools in October.

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Overall inflation as measured by CPI rose 7.7% year-over-year (YoY), below the 7.9% estimate.

The annual inflation rate fell to 7.7 percent in October from 8.2 percent in September, according to the consumer price index (CPI), a closely watched inflation gauge. Economists expected the annual inflation rate to fall to 7.9 percent, according to consensus projections.

Core CPI, which excludes volatile food and energy prices, increased 6.3% YoY, below the 6.5% YoY change economists expected to see.

The October CPI report is an encouraging sign for the U.S. economy as policymakers rush to bring down inflation without causing a recession. While decline in inflation will not be enough to keep the Federal Reserve from raising rates, it may allow the bank to do so at a slower pace.

References:

  1. https://thehill.com/policy/finance/3729055-inflation-fell-to-7-7-percent-annual-increase-in-october/

Monetary Tightening

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“We have overstimulated the economy by a big factor” ~ Sam Zell

Billionaire investor Sam Zell told CNBC Squawk Box that he sees no reason to be optimistic that there won’t be further severe economic (recession) and market (bear market) pains. “We have overstimulated the economy by a big factor,” Zell remarked. “We have to take the punch bowl away.”

He thinks a liquidity crisis may be up next and believed the whole “inflation is transitory” political soundbite originating from the Federal Reserve and the Biden Administration several months ago was an embarrassment and the phrase should be relegated to the dust bin of history.

Free money–monetary quantitative easing and historically low interest rates–leads to excess which leads to recession, states Zell. It’s really that simple.

Markets will not bottom until all that excess loose money bleeds out of the economy and Fed tightens its monetary policy. The pain of recession and further market decline are needed and will be good for long term markets.

The Federal Reserve maintained a too loose and easy monetary policy for too long.

“If you get really good at what you do, you get the freedom to be who you really are.” ~ Sam Zell

References:

  1. https://www.costar.com/article/1152237605/real-estate-magnate-sam-zell-moonlights-as-economist
  2. https://www.agriculture.com/news/business/risk-and-reward-a-conversation-with-sam-zell

Sam Zell, founder and chairman of Agricultural Real Estate, used to joke that his father made a life-or-death decision when he was 34 years old, and then never made another mistake again. Zell was inspired by his father’s confidence.

Strong Jobs and Weakening Global Oil Demand

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Strong September U.S. job data showed that the U.S. economy is still running faster than the Federal Reserve would like, making it all but inevitable the central bank will continue to raise the federal fund interest rates through the end of the year in an attempt to curb inflation, according to Charles Schwab’s Schwab Market Perspective.

The Federal Reserve is trying to slow down economic growth to prevent inflation from becoming entrenched. WSJ

Higher interest rates imposed by the Federal Reserve don’t affect the U.S. economy only—the pain spreads around the globe as other countries’ currencies weaken against the U.S. dollar.

The Fed combats inflation by slowing the economy through tighter financial conditions — such as higher borrowing costs and lower stock prices — which curb spending, further reducing employment, income and spending.

The Fed has raised its benchmark lending rate by three percentage points so far this year, but you wouldn’t know that from the burgeoning jobs market.

Fed Chair Jerome Powell has acknowledged that the central bank’s fight against inflation will likely involve “pain for some households and businesses,” alluding to the risk of recession and rising unemployment. However, the Fed’s moves are also causing pain beyond U.S. borders.

The Fed is often referred to as the “central bank to the world” because its policies have a big influence on the global economy. Because the dollar is the world’s reserve currency, U.S. interest rate changes ripple across the globe in the form of currency volatility.

Meanwhile, this month’s announcement by OPEC+ members that they will curb oil production may not have as big an impact on oil prices and global inflation as some investors fear.

Source: Charles Schwab, Bloomberg data as of 10/8/2022.

Historically, OPEC hasn’t driven oil prices—it has followed them. OPEC output tends to lag changes in oil prices by about three months, meaning the cartel tends to cut oil production after prices fall when demand weakens, and increase it after prices are already rising when demand improves.

And demand for oil has been weakening. The International Energy Agency’s September Oil Market Report projected that oil markets would be oversupplied by 1 million barrels per day (mbpd) in the second half of calendar year 2022.

As a result, the OPEC cuts aren’t likely to be a meaningful driver of global inflation or the economy, but could instead serve as a lagging indicator of the slowing demand for oil as the global economy weakens, projects the Charles Schwab Schwab Market Perspective.

  1. https://www.schwab.com/learn/story/market-perspective
  2. Nick Timiraos, Flush Consumers Vex Fed Strategy, The Wall Street Journal, October 31, 2022, pp. A2.