Over the last ten years, the U.S. Federal Reserve engaged in a policy of keeping the fed funds rate at historically low levels. Its ability to maintain the policy is based on inflation staying weak.
With low inflation in the two percent range, the Fed could employ non-traditional strategies like quantitative easing to buy a wide variety of fixed income instruments in the open market using government capital.
The major risk of the strategy is extending these low interest rate policies for too long and having inflation spike.
Inflationary Pressure
Over ten years into this unprecedented policy experiment, inflation now plagues the country in a big way.
In fact, according to the most recent Bureau of Labor Statistics inflation reading in December, the seven percent jump in prices year-on-year is the highest level since 1982.
In the spring and summer of 2021, Fed Chairman Powell and Secretary of the Treasury Janet Yellen made the rounds and repeatedly told the country inflation was transitory.
Shifting Gears
They have now reversed course. Investors are looking at a series of interest rate hikes over the next year. How many rate increases are we looking at? There are some economists who believe four, while others see more than that.
Cooling down inflation and trying to manage an economy still burdened by Covid variants and regulatory overreach was not what either policymaker envisioned a few years ago.
Faced with the realization that Fed tapering will be more aggressive than previously envisioned, the investment world quickly concluded assets need to be repriced.
Tougher Climate
In my opinion, any company that focuses on its long-range prospects without having the financial performance to back it up will be dismissed by investors in the current market climate.
Companies focused on space tourism, electric vehicles, lithium batteries, and hydrogen fuel cells are getting a harder look in my view.
Or consider the carnage in the crypto-currency markets in recent weeks.
Conversely, value-based industries, in the doghouse for a decade or more, have suddenly caught a major tailwind in my opinion.
Energy and financials are good examples of this trend as are agriculture and some parts of real estate.
Looking forward, I believe investors will be focused on supply chains, vaccination rates and confirmation that the Covid pandemic has peaked.
Photo Credit: GPA Photo Archive via Flickr Creative Commons
Disclosure
This piece is provided as educational information only and is not intended to provide investment or other advice. This material is not to be construed as a recommendation or solicitation to buy or sell any security, financial product, instrument, or to participate in any particular trading strategy.
