Inflation is the Nightmare Monster

Inflation is the Nightmare Monster

September 06, 2022

Inflation is the Nightmare Monster


The fed has spoken and the beastly monster they have in their line of sight is inflation. That’s the message coming out of the Jackson Hole summit last week.

Every August, the Kansas City Federal Reserve Bank hosts an economic summit in Wyoming and the fed chair gives prepared remarks that often outline the overall thinking of the voting committee. It’s a chance for economists and investors to read the tea leaves, so to speak.

As an example, following the great financial crisis, we heard Ben Bernanke sketch out quantitative easing, the newly tweaked central bank bond buying program, and the way forward for the fed then in terms of dealing with the hangover of the housing meltdown.

Chair Jay Powell this year in his remarks has made the pivot from “inflation is temporary” to “inflation is the beast” that needs to be tamed, no matter what it takes. Here are a couple of quotes from Chairman Powell from last Friday from his prepared remarks published by the Federal Reserve:

              " Reducing inflation is likely to require a sustained period of below-trend growth… Moreover, there will very likely be some softening of labor market conditions."

              "While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain. "

Fun stuff. This is after telling us for almost two years that inflation was “transitory” and would clear up as soon as supply chains worked out their pandemic induced snarls (see remarks from 2021 https://www.federalreserve.gov/newsevents/speeches.htm). The reasoning behind higher interest rates and reduced bank liquidity is that it should cause the economy to slow, which will balance out the supply and demand curve.

What we might also expect besides slower growth is that assets, like homes and other real estate, stocks, bonds, etc. will decline in value in response to an aggressive fed that hikes rates until the inflation targets are in place. If we believe Jay Powell, that would mean an average inflation reading of near 2%. It’s not clear how much room they have to keep raising interest rates to meet the target but they have laid out their intention.

So what can investors do to adjust to this change in approach?

An environment where money, the capital for funding projects, is more scarce and expensive means investors will be less likely to hold on to investments that do not provide immediate returns. This is why we are seeing a rotation from growth stocks to value stocks, or stocks that pay attractive dividends. While an investor before may have been fine to hold a company that was not profitable now but showed great growth potential, in a higher interest rate and higher inflation scenario that same investor could be much less patient to wait for profits to flow.

Stocks can provide a good hedge for inflation, but allocations may need to be revisited. At least until the fed decides this monster has been tamed.


The opinions voice in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Asset allocation does not ensure a profit or protect against a loss.