All Eyes Remain on the Fed and Inflation

Chart of the Month
Written By Jonathan M. Elliott, CPWA®, CRPC®, CDFA®, ChSNC®, CPFA™, RMA®

The market’s focus on Federal Reserve policy remains unchanged as stubbornly high inflation forces the Fed to raise interest rates and shrink its balance sheet. The Fed’s aggressive tightening actions are increasing market volatility and causing stock and bond prices to trade lower. The S&P 500 is now in a bear market, defined as a -20% decline from recent highs, and interest rates are rising to multi-year highs. The 2-year Treasury yield recently rose to its highest level since 2007 as investors bet that 40-year high inflation will push the Fed to be more aggressive.

How does this tightening cycle compare to prior cycles? The most notable difference is the speed and size of the interest rate increases. Figure 1 compares the current cycle’s fed funds rate path against the last five cycles. Factoring in the +0.75% increase at this week’s June meeting, the Fed has raised interest rates +1.50% since the first increase in March. Investors expect the Fed to return to its +0.50% pace at the July meeting, making 2022 the fastest +2.00% increase compared to the last five cycles. The Fed is expected to keep raising interest rates at its meetings later this year, although the increase amount remains an open question.

Comparing Fed Funds Rate Movement Across Tightening Cycles

Comparing Fed Funds Rate Movement Across Tightening Cycles

The chart shows the current Fed tightening cycle has more in common with the 1988 and 1994 cycles than the post-2000 cycles. It’s a market environment investors haven’t experienced in a long time. The Fed’s aggressive actions are driven by widespread price pressures across food, energy, housing, airfares, vehicles, etc. This raises a particularly concerning risk – persistently high inflation could provoke the Fed to tighten too much and negatively impact economic growth. High inflation could become entrenched, as well as significant uncertainty about how high and fast the Fed will need to raise interest rates to contain inflation. The result is a market trying to navigate uncharted waters.

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Jonathan M. Elliott, CPWA®, CRPC®, CDFA®, ChSNC®, CPFA™, RMA®

I am currently the Managing Partner for our independent investment advisory firm, Optima Capital Management. Together with my business partners, Todd Bendell CFP® and Clinton Steinhoff, we founded Optima Capital in 2019 as a forward-thinking wealth management firm that serves as an investment fiduciary and family office for high-net-worth individuals and families. In addition to being the Chief Compliance Officer, my role at Optima Capital is portfolio management. I have over 18 years of experience in managing investment strategies and portfolios. I specialize in using fundamental and technical analysis to build custom portfolios that utilize individual equities, bonds, and exchange-traded funds (ETFs). I began my financial services career with Merrill Lynch in 2003. At Merrill, I served in the leadership roles of Market Sales Manager and Senior Resident Director for the Scottsdale West Valley Market in Arizona. On Wall Street Magazine recognized me as one of the Top 100 Branch Managers in 2017. I am originally from Saginaw, Michigan, and a marketing graduate from the W.P. Carey School of Business at Arizona State University. I am a Certified Private Wealth Advisor® professional. The CPWA® certification program is an advanced credential created specifically for wealth managers who work with high net worth clients, focusing on the life cycle of wealth: accumulation, preservation, and distribution. In addition, I hold the following designations - Chartered Retirement Planning Counselor (CRPC®), Certified Divorce Financial Analyst (CDFA®), Certified Plan Fiduciary Advisor (CPFA), and Retirement Management Advisor (RMA®). In the community, I am a member of the Central Arizona Estate Planning Council (CAEPC) and serve as an alumni advisor and mentor to student organizations at Arizona State University. My interests include traveling, outdoors, fitness, leadership, entrepreneurship, minimalism, and computer science.

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