How to Cope With Rising Rates and Inflation

Important information has arrived in the last few days, but the fog over the markets and economies cannot be wiped out.

Is the economy in recession? Is inflation suppressed?

The clear answer is who has a job or wants to get it, who has an invoice to pay, a house to buy or sell, an apartment to rent, a loan to make or repay, or worry Important for those who have an investment. Really for almost everyone.

But no one has those answers.

Obviously, it would be better if it became clearer, but it simply doesn’t exist. Wise people need to take two paths: making long-term investments and preparing for short-term troubles.

background

First, on Wednesday, the Federal Reserve Board announced that it would raise short-term interest rates by 0.75 percentage points and the federal funds rate in the range of 2.25 to 2.50 percent. This surged from near zero in early March.

Then on Thursday, the Commerce Department announced that economic output, measured by GDP, declined in the second quarter at a seasonally adjusted annual rate of 0.9%. That was the second consecutive quarterly decline. The new data will be revised and does not mean that it is in recession, but nonetheless, this report has prompted considerable manual effort.

Federal Reserve Chair Jerome H. Powell said at a press conference Wednesday that the Fed was deliberately “slowing down the economy” to curb inflation. But about its value, Powell said he still doesn’t believe the economy is in recession. JobsFor example, it’s still abundant.

He didn’t even make a firm prediction as to where he would end up later this year or in 2023. He said the Federal Reserve would pay close attention when new information arrived, and after a while there were some.

Two Democratic senators, Joe Manchin III in West Virginia and Chuck Schumer, a majority leader in New York, are vast about climate and energy programs, medical subsidies and prescription drugs, taxes, and perhaps more. Announced that an agreement has been reached. They call it the 2022 Inflation Reduction Act. That’s because tax increases outweigh spending in 10 years. However, the details are crude and the possibility of the bill is uncertain.

Please read all this news. Then continue with caution.

Unanswered questions

Even if you limit yourself to issues that directly affect the US economy and markets, and perhaps issues that directly affect your personal finances, there are considerable risks at this time.

At the top of my list is inflation. Increasing evidence of runaway inflation has shocked consumers and shaken the political situation.

When last time inflation was so hot, Ronald Reagan was president and Paul Volcker was chairman of the Federal Reserve Board. If you weren’t around that time, think of Volcker’s main mission was to “break down the inflation recession.” Powell now has that as his mission.

At this point, oil and gas prices have fallen slightly, but are still high. Meals at homes and restaurants, clothing, used and new cars, apartment rents, home prices and much more.

Powell said Wednesday that the Fed is currently expecting the federal funds rate to rise 3.5% by the end of this year, perhaps another 0.5 points by early 2023.

Ugly link

Unfortunately, inflation and recession are related.

This is because the Fed has only a dull way to curb inflation. That is, raising interest rates, selling securities, and so on. $ 8.9 trillion The portfolio and what it calls “forward guidance” show its intent. These measures affect the market and ultimately innumerable daily purchase and spending decisions. The Fed uses its tools to encourage people and businesses to reduce their demand for goods and services. Powell says he wants to give the economy enough “slack” to keep inflation cool.

The problem is that while the Fed can impact demand, it has no control over the supply of goods and services.

Pandemics and wars in Ukraine have created many shortages and bottlenecks. But there are some signs that they are already mitigating.

The Baltic Dry Index, which tracks global shipping prices, has fallen 40% since its peak in May. In addition, economic studies in the United States, continental Europe, the United Kingdom, and Japan show that “supply lead times” and inventory accumulation are declining sharply.

Chris Williamson, Chief Business Economist at S & P Global Market Intelligence, who conducts these surveys, said that the rapid slowdown in business activity has already caused an economic “sea change.” ..

“If the central bank continues to raise interest rates, policy makers need to open their eyes to do this,” he said in an interview. Based on this data, continuing will cause a significant recession. “

When do you know

The National Bureau of Economic Research, which decides if a recession actually happened, It took 15 months Declare the end of the last one. It will definitely take as long as you need to look back, as it cannot be understood correctly in the present tense. Guess aside, I don’t think anyone can do it.

For example, on June 9, 2008, in the midst of what we now know, there was the longest and most severe recession since World War II. Ben S. BernankeThe Fed chair, the conditions are Improvement..

“The risk of a major recession in the economy seems to have diminished in the past month or so,” he said. In reality, the housing market is already weakened and the entire financial system and economy will soon collapse.

So I really don’t know if we’re in recession and it’s fast enough to make a difference. Still, I know when it feels tough. At that point, if you haven’t prepared yet, it may be too late to prepare.

What to do now

For now, if you don’t have enough cash reserves yet, save money so you can pay your invoice. Best of all, avoid credit card debt turnover. Equal temperament has risen to 17.25% and has already been punished.

Take advantage of the rate of increase for your savings. For example, interest rates on money market funds are about a month behind the rise in Fed rates. It is now well above 1%, and in the next month or so, standard money market funds should have interest rates above 2%. Certificates of deposit, short-term government bonds, and I bonds are good options.

Then invest in the long run. Despite poor performance in equities and fixed income this year, the outlook has improved significantly.

David Rosenberg, Chief Economist of his company Rosenberg Research, Warns that a recession is coming since winter. So he is bullish on government bonds. “If there is a recession, you will want to keep them,” he said.

I am not obsessed with the problem of recession. I don’t know where things are going, so I always hold a combination of stocks and bonds and do that with cheap index funds. Will the stock bear market end? Yes, if there is no recession. But if there is something deep, the stock can be even more throbbing. Nevertheless, for people with a long-term view of more than a decade, steadily buying stock through a wide range of index funds can be a good bet.

According to Vanguard, the market hit this year is on track. “The very low prices have improved long-term expected returns on both equities and fixed income,” said Andrew Patterson, senior international economist at Vanguard.

Rely on the unpredictable market. Learn to live with them by putting together a long-term plan for savings and investment. I will come back with more suggestions on how to do it.

Once you’ve put your plan into action, try to forget it for a while. If you’re lucky, you’ll know you’re protecting yourself when the next uneasy news arrives.