Don’t Fight the Fed When the Fed Is Fighting Inflation

April 29, 2022
By Tim Courtney, Chief Investment Officer


The latest data from the U.S. Bureau of Labor Statistics shows the most recent inflation level at 8.5%. This marks the highest 12-month increase since 1982. We see the impact of this record-breaking reading across the board, with housing, food, and energy hit particularly hard. Wages are also rising to keep pace with inflation, but this will filter down into the pricing of goods and services.1

When inflation peaked in the 1980s, the Federal Reserve responded with large interest rate hikes. This caused mortgage rates to skyrocket to 18%, and eventually kicked the economy into a recession, prompting major economic and political repercussions.2

Just as we saw in the 1980s, controlling inflation is the Fed’s top priority. The longer inflation sticks around, the risk of another recession and political repercussions increase. When inflation gets too high, consumers will limit purchases, and companies will pull back on spending.

Although it looks like it hasn’t happened yet, the risk of slow economic growth is increasing. At the same time, investors are finally realizing inflation is not transitory. For several quarters, many expected the Fed would come to the rescue, just as it did in 2018 when the markets threw a tantrum.3 However, we have gone way above what most economists anticipated.

With a bit of tough love from the Fed, we believe the market has finally capitulated to reality. The markets have come around to the risk of inflation and the need to increase rates to compensate.

As another testament to the market’s receptiveness, we look at the yield curve. This has been flashing warning signals, but has moved back and forth from inversion to normal over the last few weeks. Either way, the market has moved to accept the higher inflation level.4

If that’s the case, the Fed successfully talked the markets into doing exactly what it wanted it to do. The old saying, “Don’t fight the Fed” stands true again. The markets are now pricing in rate hikes across the spectrum, and there is a possibility the Fed does not have to implement hikes as aggressively as anticipated.

At Exencial, we believe inflation remains a risk to investors. As we continue to see rate hikes priced in, we think it is a necessary and healthy reaction to attempt to manage inflation. If you have any questions about how inflation may be affecting your assets, please contact your Exencial advisor.


1.  The U.S. Bureau of Labor Statistics (4/12/22) — Consumer Price Index – March 2022

2.  Freddie Mac – 30-Year Fixed-Rate Mortgages Since 1971

3.  NBC News (3/21/18) – New Fed head approves first rate hike of 2018

4.  CNBC (4/25/22) – U.S. 10 Year Treasury

The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. Changes in the CPI are used to assess price changes associated with the cost of living. The CPI is one of the most frequently used statistics for identifying periods of inflation or deflation.

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