The “Don’t Fight the Fed” investment saying has so far proven to be right in 2022. The Federal Reserve Board (FED) and other central bankers globally are caught with interest rates too low for the current inflation rates being posted in their respective countries.
To some degree we may have panic starting to set in with central banks, as we see recent interest rate increases of three quarters of a percent. The FED, at their meeting just over a month and a half ago, state they saw no need for regular increases in interest rates to be greater than half a percent. Also, future FED meetings are anticipated to have additional three quarters of a percent increases in interest rates. Many financial analysts see those types of increases for the next two FED meetings.
The Bank of Canada may now follow the FED’s lead and raise interest rates in Canada by three quarters of a percent when it next sets interest rates in Canada.
As interest rates increase, investors become more concerned with the effects these rapid interest rate increases will have on global economies.
As lending interest rates rise, credit becomes more expensive, so demand for credit starts to decrease and consumers and corporations reduce their spending and economic activity begins to slow. This potential of a recession next year or the year after is what has the global stock markets selling off in 2022. No one really knows how high interest rates have to go to choke off the rapid rise in inflation we have experienced over the last year.
Over a year ago, central bankers were very slow in raising interest rates and reducing stimulus as they saw inflation starting to accelerate. This lack of action concerns investors. What would give anybody confidence that the central bankers will get it right this time. The soft-landing central bankers are hoping and planning for rarely happens. Usually, interest rates have to go high enough that a recession occurs, sometimes quite a severe one.
In summary, 2022 has been painful, but over the next few months I see interest rates peaking, which will be good for markets. Once interest rates stabilize, it usually allows stock markets to start to move up as economic conditions become clearer, and inflation becomes much less of an economic factor. We are still quite conservative in our investment strategy for the next few months. Over the next few months, you could see an opportunity to buy stocks which have sold off, along with higher fixed income yields as interest rate increases work their way through the bond market.
Please stay patient as I do see financial conditions improving over the next year or two.
If you have any questions or concerns, please feel free to contact me.
Best regards,
Bill Achtymichuk