The Fed Continues To Focus On Inflation

Inflation data continues to run hot. We saw an increase in market volatility after the recent release of May's CPI data. The S&P 500 Index officially moved to a bear market last week.

In response to persistent inflation, The Fed increased its benchmark rate in June to a target range of 1.5 – 1.75% by making a 75 basis point increase - the first 0.75% move since November 1994. The new set of economic projections and Fed Chair Powell’s press conference all highlighted a Fed emphatic about getting inflation under control.

The Fed’s is trying to control inflation by keeping long-term expectations anchored. Even though the increase was dramatic, the fed funds rate is still below what is generally considered neutral, estimated at roughly 2.5%.

"...There’s not an easy fit between what the Fed may have to do to bring down inflation and the soft landing they’re trying to achieve. The choices are going to get harder over the second half of the year,” said LPL Financial Asset Allocation Strategist, Barry Gilbert.

Here are three observations in response to the recent rate hike:
  • Raising rates helps control inflation by lowering demand. The Fed’s main fight right now is against long-term inflation expectations. Once expectations go up, they are hard to bring back down. That’s part of why the Fed thought the 0.75% hike was important.

  • There is a point for rates where the economy breaks. The Fed is trying to slow growth so that demand comes back down without actually pushing the economy into recession. The Fed doesn't exactly know where that breaking point is, therefore they likely will continue hiking rates at a gradual pace vs. implementing all the rate hikes at once. We expect the Fed to hike rates again during their next meeting in July. The market is currently pricing in another 0.75% hike.

  • Inflation has been the weak spot on the economy and has been stressed repeatedly with supply chain disruptions, excess stimulus due to a surprisingly robust recovery and a tight labor market with many workers leaving the labor force. On top of everything else, commodity prices have increased due to the war in Ukraine. If supply chains improve, we could see inflationary pressure ease. The question is whether improvements will happen fast enough.

Our Covenant Wealth Strategies Investment Team is closely paying attention to market signals - including both fundamentals and technicals – in an effort to make wise and appropriate choices in our investment portfolios. We are also executing tax loss harvesting strategies in non-qualified accounts to take advantage of the volatility. We offer a variety of different investment models to our clients. In our Protect and Advance models, we have also been scaling risk out to dampen volatility and protect on the downside.

If you have specific questions related to your own investments or financial planning needs, we welcome you to contact us to set-up time to discuss how we can assist you.


This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

All index data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.