It has been almost five weeks since my last blog as I was on a 4,317-mile camping trip with my 13-year-old daughter and 15-year-old niece. I have thankfully returned safely and sanely.
The anticipation and nervous energy of preparing for a 3.5-week camping trip culminates in the day of departure. We then spend a day or two structuring some sort of routine, teaching and learning responsibilities, and setting and understanding expectations.
Once everyone is reasonably comfortable with how we roll, we settle in and really start to enjoy the trip. I try to plan a decent mix of educational or historical tours, cultural institutions, and fun activities, but leave plenty of flexible time to partake in spontaneous adventures or for “girl-planned” days where I simply provide transportation. We have a lot of fun.
And then we eventually reach the trip’s last campground. Our next destination is home instead of a new place to explore. The end is near. As exciting as the trip has been, we always look forward to going home where life is more predictable. This year we even headed home a half-day earlier than planned.
The Federal Reserve started out their current rate-hiking trip on March 16, 2022. It has been an interesting journey, but bond traders are thinking the end is near. They are pretty certain there is one more stop on this trip on July 26 when they expect the Federal Reserve to raise their overnight interest rate by another .25%.
As I write this on Tuesday morning, economists are expecting Wednesday’s Consumer Price Index report for June to show a continued decline in inflationary pressures. However, the general consensus is that core inflation will still be up 5% over the last twelve months. This is thankfully less than the 5.9% core inflation reported in June 2022, but it is still more than twice the Federal Reserve’s stated 2% inflation goal.
It is hard to understand why bond traders are thinking the end of the rate-hiking trip is so near when the distance to the Federal Reserve’s desired destination is so far. Here are the a few reasons bond traders could point to that the end could be near:
- Housing costs make up a significant portion of the Consumer Price Index (34.6%). While rental costs nationally have been declining for several months, these declines have not shown up in CPI data yet. When the CPI report starts to reflect these decreases, core inflation could continue dropping.
- Regional banks are curtailing lending to improve their balance sheets and reduce risk. Businesses and consumers may have less access to credit and, therefore, spend less. Less economic activity could help keep inflation trending down.
- Student loan repayments begin in October, reducing the amount of discretionary spending available for many younger households. Paying debt instead of spending could help keep inflation trending down.
- Political considerations require that the economy be at least picking up steam (if not humming) by late summer or early fall 2024. The longer the Federal Reserve keeps hiking interest rates, the higher the likelihood of an economic downturn lasting too long.
Bond traders could also be flat out wrong that the end is near. Perhaps the strong labor market will force the Federal Reserve to extend their rate-hiking trip.
Unlike a camping trip where I have made campground reservations along the way, the Federal Reserve’s rate-hiking trip is far more flexible and less predictable.
While overpaid prognosticators are compulsively trying to predict when and how the Federal Reserve’s trip may end, our approach is to accept that the future is by definition unknowable, to focus on helping you work toward your personal long-term goals, and to maintain a long-term perspective in an incredibly short-term world.
If you have a friend or family member that deserves a caring person to help them plan their personal journey, please share us with them today.
Quote of the week: Carl Richards: “The biggest risk investors face is getting scared out of their plans at exactly the wrong time.”
