The Risk Pendulum Swings

This week, the biggest risk to the financial markets seemed to shift from the fears of rising inflation to the possibility of a U.S. recession in 2023. On Tuesday, the consumer price inflation (CPI) data registered at 7.1%, lower than the 7.7% rate in October. This was also the slowest 12-month pace since December of last year and below expectations of a 7.3% increase. Even more encouraging is that it has fallen over 2% since June. Our view is that the move from a 9% CPI in June to the 4-5% CPI may happen in 2023. However, seeing it fall further towards the Fed’s stated goal of 2% will be a lengthier process.

Consumer Price Index 2022

On Wednesday the Fed approved an interest-rate increase of 0.50% bringing the benchmark federal-funds rate between 4.25% and 4.50%. This marks a 15-year-high for the fed funds rate. They also signaled plans to lift rates through the spring and consensus is now that the rate peaks in the 5.0% - 5.5% range. The decision Wednesday marked a new phase of lower increases after four consecutive 0.75% increases. The rationale for the rate increases is to bring down inflationary pressures and Chairman Powell continues to be steadfast in his view that combatting inflation is worth the risks imposed on the economy.

The market reaction to these events saw yields on bond rates fall and stocks move slightly positive initially, then giving back those gains later in the week. The improvement in the CPI numbers acted as a nice catalyst to the equity and bond markets, but now the worry shifts towards an economy that may start to see the increasing impacts of this year’s series of interest rate hikes. Heading into 2023, our view is the U.S experiences a mild recession or at the very least a few quarters of below trend GDP growth. Just as the Fed was hesitant to start hiking this time last year when inflation started ratcheting up, Chairman Powell will need plenty of evidence before declaring victory over inflation. Interest-rate hikes may be coming in smaller steps, but the direction is still higher.

Source: The Wall Street Journal, Labor Department

The opinions expressed are those of Harrison Financial Services as of December 15, 2022 and are subject to change. There is no guarantee that any forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment or security. Please remember that all investments carry some level of risk, including the potential loss of principal invested. Indexes and/or benchmarks are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance and are not indicative of any specific investment. Diversification and strategic asset allocation do not assure profit or protect against loss.