Every year in the last quarter of the old year/first quarter of the new year, I receive invitations from banks and brokerage firms to seminars about where the economy is headed. This has happened through COVID, virtually of course, as well as every other historical event. Such seminars are opportunities for firms to show off their competencies and to market to people who have and control money.
This year, invitations have been scarce. It’s not because the firms want to save money, or that Covid has confused them. I believe it’s because the mix of war in Ukraine, inflation, and energy shortages makes it near impossible to make predictions.
Alexander Pope said, “Fools rush in where angels fear to tread.” So, I am jumping in to make some comments.
Interest rates had to go up. We have had unusually low interest rates for a couple of years. I can’t recall interest rates so low in my lifetime. With a long perspective, current increased rates are still relatively moderate. Low rates of the past several years subsidized borrowers while penalizing savers. The person who used to buy CDs or bonds went into the stock market instead to try to get a better return. Now that interest rates are back at more attractive levels where one can safely earn around 5% interest, my bet is that more money will be going into savings/bonds and not into the stock market.
Current inflation is relatively easy to understand. During COVID, the government pumped money into the economy: stimulus checks, waiving tax on unemployment income, spending on vaccines and healthcare, grants to local governments, small business tax credits, and PPP business loans. More money chasing fewer goods and services causes… inflation. The silver lining is that with everyone sitting at home during the worst of the pandemic, we easily could have had a depression. The Treasury Department and Federal Reserve deserve a lot of credit for avoiding this fate.
Trees don’t grow to the sky. I believe the moves by the Federal Reserve will have the desired effect of curbing inflation. Tech companies are already laying off staff, and financial institutions may be next. The Fed’s interest rate increases have just about run their course.
Real estate has been on a tear since around 2009. The history is that developers build, build, build, until demand outstrips supply, there’s a bust, and then it takes some years to rebalance. Unusually low interest rates fueled the industry and prolonged the boom, but no more. The interest rates are cooling demand and making some development uneconomic. This is what the Federal Reserve wants.
I don’t have any insight into the war in Ukraine, other than another of my favorite expressions – “The world doesn’t come to an end.”