The Fed raised rates another 75 basis points. How concerned should investors be about tipping into a recession if the Fed chooses to raise again?
Since the Fed has raised rates another 75 basis points there are many concerns that investors may be experiencing, but they shouldn’t be overly concerned. It’s certainly possible that we could tip into recession over the next year as the Fed continues to raise rates to fight inflation. Business cycles are natural and unavoidable. The rate increases are intended to slow growth, but the Fed is walking a tightrope in terms of trying to slow demand by enough to bring inflation down but not so much as to cause a contraction. So while a possible near term recession might be a bit uncomfortable, it may be necessary to accomplish the more important goal of taming inflation. While the slow down in growth from higher rates is uncomfortable, business cycles are normal and it’s better to take a small dose of medicine now to avoid major surgery later.
Should investors be more worried about a recession or inflation? Where should they put their focus and protection right now?
High inflation is the bigger concern right now. If inflation were to get entrenched and consumers begin to expect higher inflation in the future, that’s a worse outcome than a recession over the near term. The longer inflation is allowed to persist, the stronger the required policy medicine to tame it and the more painful the ensuing economic adjustment. Investors should focus on owning quality, reasonably valued assets right now. Owning good assets that will compound over time and outpace inflation is the best way to protect your savings.
What is the most common mistake investors make when the Fed increases rates?
The most common mistake in a rising rate environment is the same as in any environment and that’s when investors let emotion control their decision-making and lose sight of the long term. So long as investors have a solid financial plan and appropriate portfolio construction that aligns with both their objectives and risk tolerance, then drastic repositioning shouldn’t be necessary. Economic cycles are a part of investing, the key is to stay invested and stick to the long-term plan. If you’re feeling out of control in this situation there are a few things to do to avoid these common mistakes.
What strategies can people implement to avoid these mistakes?
Bouts of market volatility such as this are great opportunities to review your long-term financial plan and portfolio with your advisor. The more comfort an investor has with their financial plan, the less likely they will be to let fear or greed tempt them into mistakes. For most investors, especially those that have a solid financial plan, drastic repositioning will not be necessary, so a review serves to ease the anxiety. For some, it may even be an opportunity to invest in high quality assets at substantially lower valuations than last year.
How restrictive do you think interest rates will get? Is it possible that July’s three-quarter point move will be the last of this magnitude during tightening?
The benchmark rate target is currently 2.25-2.5% but will likely rise to 3.0-3.5% by year end. Whether or not this is the last 75 basis point raise depends on how inflation progresses, but it seems more likely that we see only 25-50 basis point increases going forward. By having a solid long-term plan, a raise will hopefully not make a huge impact on someone’s portfolio. It is better to be prepared than having to scramble at the last minute.
What’s the bright side of this past rate hike?
Focusing on just the negative won’t get investors far. The positive is that the Fed is taking action – albeit belatedly – to tame inflation, and that is a good thing. While the alternative – lower rates and a potentially higher stock market – might seem better on the surface, it would likely result in even higher and even more entrenched inflation, which would be much worse for the economy and investors over the long term. It’s important to stay focused on the long term and stick to your financial plan. Higher inflation and a mild recession could be just what the doctor ordered.
Advisory services offered through Prime Capital Investment Advisors, LLC (“PCIA”), a federally registered investment adviser. PCIA: 6201 College Blvd., Suite #150, Overland Park, KS 66211. PCIA doing business as Prime Capital Wealth Management (“PCWM”) and Qualified Plan Advisors (“QPA”).
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