“BREAKING THE BANK”

Major economic disruptions create major economic consequences. Since the 2020 COVID induced economic slowdown, the Federal Reserve (Fed) has tried to convince us they magically shielded us from any resulting negative economic consequences. Three years later, evidence is starting to pile up that the Fed simply delayed the inevitable consequences.

Consequence 1: Since 2020 the Fed has juiced the economy by injecting 37% newly created dollars into the money supply. To date, all that “free” stimulus money has prevented a recession. However, it did little to increase actual economic output, as measured by gross domestic product (GDP). In the past three years, GDP has only grown about 5.2%. We now have 37% more dollars to pay for 5.2% more goods and services. That's a classic economic formula for inflation. Companies, always looking to maximize profits, saw it as a green light to raise prices. That's why inflation remains after supply chain kinks are long gone.

Consequence 2: For the past year the Fed's policies have been directed at fighting the inflation it helped create. Instead of attacking the underlying cause (the excessive money supply) the Fed instead turned its focus to interest rates. As far as I know, using rates to control inflation fueled by the money supply is a new economic experiment. Higher rates means consumers should borrow less and therefore spend less. Lower consumer spending will hopefully lead companies to hold the line on prices, thus bringing inflation in check. Unfortunately, slowing down consumers means we need fewer workers. Even before recent banking turmoil, the Congressional Budget Office was projecting unemployment would go from 3.6% to 5.1% by year end.

Consequence 3: There's an old saying, “the Fed raises rates until something breaks”. On March 7, the Fed Chairman hinted at accelerating rate hikes. He said,”if faster tightening is warranted, we would be prepared to increase the pace of rate hikes”. Two weeks later following the “breaking” of several banks, he was leaning in the other direction saying "It could easily have a significant (think negative) macroeconomic effect, and we would factor that into our policies”. Bankers are now likely to hand out fewer loans, thus creating and possibly reinforcing the very economic slowdown the Fed was shooting for with its rate hikes.

The best time to buy stocks is often when nobody else wants them. I believe the recent confluence of events and fading investor enthusiasm puts us closer to that point than any time in the last three years.

Frank Rizzo, CERTIFIED FINANCIAL PLANNER TM

The opinions in this material are for general information only and not intended to provide specific advice or recommendations for any individual. The economics and market forecasts set forth in this material may or may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Investing includes risk, including fluctuating prices and loss of principal.