The Federal Reserve has finally become much more serious about controlling inflation. Inflation has gotten so hot by any measure, including core CPI, that Jay Powell can no longer keep his head in the sand. His Fed is pulling trillions in liquidity out of the market by reducing the size of its balance sheet and moving the Fed Funds rate up by 75 basis points to a range of 1.50% to 1.75%. And, there is more to come.
Powell now says that the July meeting will involve either a 50 or a 75 basis point increase in the Fed funds rate and that additional rate increases in 2022 will be warranted. The Fed’s own Fed funds forecast now puts the Fed funds rate at 3.40% by the end of 2022 and 3.80% by the end of 2023.
Historically, periods of extreme inflation are not necessarily appropriate times to be in cash. Real assets, like real estate and equities, can perform better as a means to maintain and store value.
This time is different. It is coming on the heals of a decade of Fed-induced real asset price inflation – and a bubble in speculative assets, including crypto – that has become especially exacerbated since the pandemic started in 2020. These bubbles are all going to need to be unwound as the Fed moves aggressively to normalize the economy and to protect it from continuing to be overcome by inflation. Perhaps it can be done without causing a recession (as argued by Ben Bernanke in today's New York Times). But, against the concurrent backdrops of an economy that is now dramatically slowing, Russia extending its war in Europe, an ongoing insurrection in the US, and a global climate crisis becoming a climate catastrophe, we may not see much in the way of other safe real assets that maintain value until valuations are fully reset.
Savings rates and CD rates are rising and these products seem like attractive places to sit for while.
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