Economy Commentary

The Federal Open Market Committee (FOMC) members have stated that they expect to begin normalizing rates this year (i.e., begin cutting) but need more confidence that inflation is trending toward its 2% targeted range. Recent economic data including today’s Consumer Price Index (CPI) and Friday’s (April 5) Employment reports are unlikely to provide that confidence. Those reports, along with others, paint a picture of continued economic and labor market strength which is leading to stubbornly high inflation readings. The Federal Reserve, and the FOMC in particular, has been given a dual mandate by Congress – price stability and maximum employment. While the Fed was solely focused on the inflation portion of its mandate during the historically high inflationary post pandemic period, the Fed Chair and committee members have suggested their focus is now more balanced between the objectives with the belief that they can continue to bring inflation down while maintaining a strong labor market. As mentioned, recent data suggests that the labor market remains healthy, but inflation has been more difficult to get fully under control. Members have also expressed significant fear of easing monetary policy soon and losing control of inflation as that would likely necessitate more extreme measures in the future, likely at the detriment of economic activity and labor markets. The slight re-acceleration in inflation witnessed thus far this year (including four straight readings exceeding expectations) along with March’s robust employment report make it a lot more difficult for the Fed to describe its monetary policy as restrictive and thus to justify near term rate decreases. We have always said the so called “last mile” of getting inflation back to the Fed’s 2% target would be more difficult to achieve than many market participants expected and that higher-for-longer on the rate side seemed to be the most likely scenario, but we must admit that the strength of the economy continues to surprise us to the upside (as outlined in previous notes) meaning the path to lower inflation and consequently lower rates continues to be pushed out. Bond markets have caught up with this line of thinking over the last couple of months and, as of this writing, have pushed out both the timing and near-term magnitude of rate cuts with only a 50% chance of a cut now forecast for July and less than two full cuts forecast this year. This compares to the median projection of three cuts this year in the Fed’s latest Summary of Economic Projections released at its last meeting. We have been expecting cuts to begin in June or July with a total of 2-4 cuts this year. Based on this data, we now believe July is the earliest we will see a cut (baring any extraneous event) and that 1-3 cuts is the range. We still see enough evidence in the underlying details within both the inflation and employment reports that support cuts this year but will admit that we are starting to favor the lower end of the range. While the higher-for-longer outlook is wreaking havoc on markets today with both bonds and stocks down, we continue to believe our strategies are positioned for this outlook with a shorter duration (i.e., less interest rate risk) across our fixed income porfolios. On the equity side, higher rates are finally impacting multiples as we foreshadowed in our recent quarterly rebalance and we continue to favor larger cap, secularly growing companies with higher quality metrics (i.e., increasing profitability, returns, free cash flow, strong balance sheets, etc.). Investing in securities is speculative and carries a high degree of risk. Past performance is no guarantee of future results. Additional information, including management fees and expenses, is provided on Advisor Resource Council’s Form ADV Part 2, which is available upon request. Material discussed is meant to provide general information and it is not to be construed as specific investment, tax, or legal advice. Individual needs vary and require consideration of your unique objectives and financial situation. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The economic forecasts set forth in this material may not develop as predicted. Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. All information is believed to be from reliable sources; however, Advisor Resource Council makes no representation as to its completeness or accuracy.