The economy appears to be at a crossroads. Is it inflation or recession? There is plenty of commentary to choose from supporting either position. Many wonder if it is possible for the Federal Reserve to raise interest rates enough to curb inflation without causing a recession. Then we add in a Russian invasion into Ukraine and higher gas prices along with continued supply chain shortages. The economy is definitely in uncharted territory.
Interest rates have remained low since 2008, fueling the economy. Inflation is at a 40-year high according to Bloomberg. The cure for inflation is to raise rates but doing so could also cause a recession. The Federal Reserve is in a tricky place.
Bill Greiner, Chief Economist with Mariner Wealth Advisors, stated recently that there is only a 40% chance the economy will return to normalcy in 2022. This is due to the growth expectation for GDP (Gross Domestic Product) cooling off. This is based on the Federal Reserve beginning to raise rates, along with continuing economic problems related to COVID-19. But he also believes inflation will come down as well. The 20-year average is 2.2 percent, and we are currently running close to 8%. As consumer expectations begin to soften and hopefully some supply chains open up, inflation is expected to decline before year end to around four percent.
Mr. Greiner sees other possibilities if the economy does not normalize: Stagflation or recession. Stagflation is where high inflation continues, and recession is where economic growth declines. While neither of these are great choices, how the rest of this year unfolds will be telling. If inflation persists and economic growth continues, we may be able to “grow” our way out. If interest rates rise too quickly and the money supply dries up, then GDP will likely decline. It will be difficult to have what the Federal Reserve likes to call a “soft landing,” where interest rates rise but economic growth continues to flourish.
There have been four recessions in the last 30 years¹ and they are considered a normal part of the business cycle. Recessions typically have high unemployment, which is the opposite of our current employment situation. This is why I call this a crossroad. The Fed action could point to a recession, but other economic indicators remain positive.
Currently there remains continued economic growth, solid corporate earnings, and low unemployment. These are all good signs. The stock market may remain volatile as it digests all of these changes, such as continued interest rate hikes this year.
Investors should consider market movements as opportunities with the outlook of continued economic growth and low unemployment. But always have your emergency reserves and a well-balanced portfolio to help during these unusual times. Interest rates will need to rise to return to normal in the 2% to 2.5% range. These changes usually cause market volatility but that is a small price to pay to avoid recession.
1. The National Bureau of Economic Research
Patricia Kummer has been a certified financial planner professional and a fiduciary for over 35 years and is Managing Director for Mariner Wealth Advisors, an SEC Registered Investment Adviser.
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