The Myopic Fed is “Skating to Where The Puck Was.”

Hockey legend, Wayne Gretzky, became great by his ability to anticipate where the puck was going before the opponent. In the economy, the Federal Reserve is chasing where the puck was already. The analogy to the Federal Reserve policies is that they are basing their decisions on lagging and outdated data, versus looking forward. The Fed was ridiculously late in raising interest rates from zero, now they are making a mistake in the opposite direction. With inflation moderating, investments are being curtailed in many sectors, industrial sectors are in decline, and the economy is being held up by consumer spending on services and government infrastructure investments.

One of the most important skills of an investment strategist is the ability to predict the future with incomplete information. Unfortunately, the Federal Reserve board leaders are myopically looking at inflation reports but failing to extrapolate the impact of future inflation, one of their mandates of stable pricing bench marked at 2% annually. Their frequent statement that they are “data dependent” is evidence of their lack of foresight.

2-Year Treasury Bond Yield 4.77%
Suggests High, Short-Term Rates Will Be Around for A While

In reviewing recent reports, the economic landscape is on a moderate growth with inflation declining nicely. Inflation is the focus of the Federal Reserve, and consequently investors. The good news is that the rate of inflation is moderating across all the indices. The Consumer Price Index (“CPI”), Producer Price Index (“PPI”), and other indices are indicating that product inflation is moderating as the chart of the CPI below shows.

Labor inflation is decreasing moderately but remains “sticky”. The problem in the labor market is the lack of workers, not that the economy is too strong. It is a long-term demographic challenge with too few persons working due to falling birth rates, acerbated retirements and Covid-related death and disabilities over the past three years. Also, child and elder care issues are factors reducing many people from the work force due to the very high cost for professional help, often making employment uneconomical for working parents. Sara Eisen, CNBC Anchor reporter, has commented about the impact of this issue on families and businesses. One positive issue may improve the supply of labor, as immigration is slowly increasing.

Despite the Federal Reserve’s best efforts to tank the economy, it grew 1.6% in the first quarter of the year and may inch up to 1.9% according to the latest Bloomberg data in the 2nd quarter. However, the 2nd half of the year could experience greater moderation in growth and could contract. In the second half of the year the impact of the sharp increase in interest rates will be felt. Like medicines, often the cure can have negative side effects. Higher interest will depend on inflation in some markets, causing problems in other markets, such as long-term investment. The cost of financing a new home, purchasing a robotic manufacturing device for a business, and the U.S. deficit have increased dramatically over the last year. Innovation created by investing new capital is now being suffocated.

Economic growth is supported by consumer spending and government infrastructure related spending. Wage gains and retirees who are anxious to travel are also positive factors. How long will this last once the Covid piggy bank has been depleted? Government spending has been stable at 1% growth and is keeping the economy from turning negative. Infrastructure investment could be at work to account for the increase in government spending. The Inflation Reduction Act is beginning to motivate businesses to build manufacturing capacity domestically rather than purchase foreign manufactured goods.

Higher interest rates impact investment spending, which is the largest negative factor influencing the overall economy. Commercial real estate, especially the office segment, has dramatically slowed due to higher interest rates and the transition to work from home. Similarly, industrial production has been declining as consumer spending has gone from “stuff” during the pandemic to “services” such as Taylor Swift concert tickets. Looking forward, tighter monetary conditions from higher interest rates and increased difficulty in obtaining financing, will have direct and indirect effect on economic growth. The longer interest rates remain at current levels, the tighter financial conditions will get.
Looking to corporate profits in the second half of 2023, some businesses may benefit from moderating inflation. For companies that have increased prices, buyers now are experiencing falling input costs, profit margins could increase. Increasing margins are one factor that can fuel stock market gains.

Although Short-Term Interest Rates Are High, The 10-Year Treasury Bond
Is Yielding 3.7%, 1% Less Than The 2-Year Treasury

To summarize, the policies and comments of the Federal Reserve suggest possible interest rate increases, and this poses a risk to the economy. The rapid increase in interest rates was a factor in three bank failures but the hidden negative impact may be the curtailment of innovation as capital has become far more expensive for small and growing companies which often create the next greatest thing.


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Andrew Hill Investment Advisors, Inc. (“AHIA”) maintains a Business Continuity and Succession Plan (“BCP”) that has been developed with the goal of protecting the health and safety of our employees and maintaining continuity of service for our clients. Our Plan is designed to ensure that we are prepared to operate through significant business disruptions, so that our clients can access their accounts without significant interruption under most circumstances.
Key elements of our BCP include the following:

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