After the bear market rally in July was extended for the first few weeks of August, Federal Reserve Chairman Powell used the Fed’s annual Jackson Hole symposium to clarify the Fed’s position on future rate increases.

Powell was clear that there would be no “Fed Pivot” until improvements in the inflation rate are sustained.

He acknowledged the costs of reducing inflation. Slower growth, higher interest rates for consumer loans, and a softer labor market are all part of the ongoing reality.

The Fed’s priority is to avoid entrenched consumer expectations of higher inflation, which partly caused the runaway inflation of the 1970s. The Fed needs to act decisively to bring inflation down quickly, which Powell described as a “forceful and rapid” approach to rate increases. 

Chart of the Month: Consumer Spending Still Chugging Along

Consumer spending is the economy’s engine, and it increased by $23.7 billion in July despite falling energy prices. Inflation is not slowing spending, and that’s also a sign of consumer sentiment that inflation may fall in the future.

Changes in Consumer Spending

Source: U.S. Bureau of Economic Analysis

The Smart Investor

The reality for investors is that the Fed is being very clear it will not bail out the equity markets anytime soon. The Fed is going to keep going until signs that inflation is definitely trending down are in place. Inflation fell last summer, too – and then trended back up in the fall and winter. The Fed wants to avoid this at all costs.

Within this framework, the markets may react positively to signs that inflation is dropping and that the labor market is loosening. Eventually, supply and demand will reach an equilibrium that allows the still-positive aspects of the economy to throw off the threat of sustained inflation.

What can investors do to keep their own goals on track?

The benefit of proactive financial planning is that there are moves investors can make and opportunities that arise as the economy moves into a new phase.

  • Asset values are lower, so it may be a good time to rebalance portfolios and add positions
  • As you rebalance, take advantage of tax-loss harvesting
  • Consider inflation-linked investments, such as iBonds to take advantage of still-high inflation
  • Position portfolios to be able to mitigate interest rate risk

 While September has a history of being a difficult month for the markets, the fourth quarter has a better track record. And don’t forget about the Santa Claus Rally!



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