On April 6th, 2023, Zach Ivey, CFA, CFP®, ChFC®, Bridgeworth Chief Investment Strategist, Chip Kalousek, Bridgeworth Director of Portfolio Management, and Anoop Mishra, Vice President of the Birmingham Branch of the Federal Reserve Bank (Fed) of Atlanta had a conversation around current market conditions. Click here to watch the recording. Outlined below are the five key takeaways from the live virtual event:
- Following strong growth in the second half of 2022, expect slower to flat growth in 2023 and a rise in unemployment.
There is a significant disparity between sentiment and actual results in the economy. Rarely are businesses discussing a recession and struggling to find employees simultaneously. Over the second half of 2022, the general economy and growth were very good. Into 2023, the Fed expects growth to slow and will be effectively flat for the year. Labor markets have remained resilient, with unemployment near historic lows, but signs that labor markets are easing are also beginning to show, and the Fed anticipates unemployment could rise to 4-4.5% by the end of the year.
- Inflation on services remains elevated as consumer spending has shifted from goods to services. The Fed expects inflation to moderate down to 3.5-4% by the end of the year.
Demand must either come down or supply must go up to slow inflation. Over the past 6-9 months, the supply issues of 2021 and 2022 have improved, and the demand for goods has also come down, but consumers have shifted more of their spending to services. This shift in spending has led to core services inflation to remain elevated, but the Fed anticipates inflation should moderate down to 3.5-4% by the end of the year as labor markets normalize and wage inflation cools.
- To avoid long-term inflation and repeating the past, don’t expect the Fed to cut rates anytime soon. Rates will stay higher for longer, even if it means a recession.
If we’ve learned one thing from the past, long-term inflation is very problematic for markets and harder to address. The Fed will always target fighting higher inflation even if it increases the likelihood of a recession. As inflation comes down and we get to a terminal rate, expect the Fed to hold rates higher for a while and don’t expect immediate rate cuts. The current Fed Funds rate is 5% and could still go higher. Rates were kept abnormally low at 0% and below the neutral rate for a long time. The neutral Fed Funds rate is where the economy is functioning without help or hindrance. The Fed had to raise rates to 3.5% to get to a position of neutrality and another 1.5% thus far to pump the brakes on the economy and quell inflation.
- Recent bank failures were an “outlier of an outlier” type event. The Fed is confident in the resiliency and underlying fundamentals of the banking system.
Nothing in the recent bank failures resembles the financial crisis. The Great Financial Crisis (2007-2008) was caused by systemic bad behavior in the banking industry at that time. The failures of Silicon Valley Bank and Signature Bank were unique in their concentration of client deposits/liabilities, poor interest rate risk management, and investment in high-risk assets. The banking sector, in general does not have these same characteristics. Nonetheless, the Fed is still investigating, which will likely result in some regulatory changes, including possibly increasing FDIC coverage for individuals and businesses. The bigger issue from this recent banking turmoil will be the acceleration of credit tightening by banks. Bank credit tightening may aid in the slowing of the economy and inflation and allow the Fed to raise interest rates less.
- A Central Bank Digital Currency currently being researched and discussed by the Fed is not a crypto or Venmo-type transaction.
The Fed is increasingly interested in a central bank digital currency as commerce continues to migrate to a more digital environment. A central bank digital currency is not a cryptocurrency, which is normally decentralized. The Fed is the opposite of decentralized. A central bank digital currency would allow real-time payments and settlements in “the cloud” and could also offer a possible solution for the millions of Americans without access to traditional financial services. The two most significant issues with a potential central bank digital currency are the fragmentation of the U.S. banking system and security. The U.S. is unique in the large number of financial institutions compared to other countries, and theft is a security concern.
To watch the full conversation, please head to our YouTube page. If you have remaining questions or concerns, please reach out to your Bridgeworth advisor.
Bridgeworth Wealth Management is a Registered Investment Adviser.
The views expressed by Anoop Mishra are his and not necessarily those of the FOMC, the Federal Reserve Bank of Atlanta, or the Federal Reserve System.