The Federal Reserve has announced the expected half percentage point increase in its benchmark lending rate.  The increase was the biggest bump since 2000.  But that only brings the interest rate to .75%.  Compare that to an inflation rate near 10%.  The Federal Reserve is indicating a greater interest in protecting the stock market than protecting against inflation.  Fed chairman Jerome Powell now states that he sees inflation as a problem, after seeing it as a transitory situation for most of 2021.  The Fed now finds itself about a year to late to the fight and unwilling to put up a serious response.

 The purpose of the Fed interest rate increase is to slow down the economy in hopes of decreasing demand and thus reducing inflation.  The Fed is hoping it threads the needle just right so that the economy has a “soft landing” and does not drop into a recession.  The Fed’s hope is complicated by its delay to raise intertest rates while the economy was booming at the beginning of 2021.  The Fed is now raising interest rates as the country is already moving into an economic slowdown. 

The fear of recession is growing.  The GDP went negative by 1.4% in the US for the 1^st quarter of the year.  Two negative quarters in a row defines a recession.  While the Fed and government officials state that the US economy remains strong, there are definite indications of a slowdown.  The supply chain disruption was blamed for many of the problems confronting the economy as we moved deeper into 2021.  There has been some improvement in the supply chain.  But the problem is resurfacing as the Covid shutdown in China continues to drag on.  There are simply no goods being produced in China for shipment to consumers around the world. 

The war in Ukraine drags on.  The Russian army is running into stiff resistance from the well trained, well-armed Ukraine army.  The US and its NATO allies are stepping up the weapon technology being handed to the resistance.  The Ukraine army is now fighting a proxy war on behalf of NATO. 

There are global complications from the war, and they worsen as the war drags on.  Russia and Ukraine produce approximately a quarter of the world’s wheat supply.  There is an expectation of famine developing in areas of the world before the end of the year.  Fertilizer produced in Russia, Ukraine and China is now off the market.  Crop yields will suffer in any country that does not produce its own fertilizer.  The US will be called on to send food supplies to famine-stricken areas of the world.  The Biden administration just moved to increase the use of corn as a fuel supplement.  That means farmland and fertilizer used to produce food for consummation will be used to produce fuel.  Meanwhile, US fossil fuel production faces stiff resistance

Europe is moving to end its consumption of oil and gas from Russia.  As oil stops moving through the Russian pipelines, they will begin to degrade.  Oil production in eastern Russia will be reduced by the withdrawal of US technology.  That oil was being supplied to China which is the world’s largest importer.  China must now find a new supply.  Those developments will continue to drive up energy costs. 

The stock market is in a moment of confusion.  Is there a strong economy or do we face recession?  No one knows the final answer to that question, so we continue to move forward.  Our portfolio will remain overweight in energy, commodities and financials.  We will remain underweight in growth, tech and small to midsized companies.  Rising interest rates will weigh on those sectors along with upward pressure on wages. 

If you have questions, comments or would like to get together, feel free to call me at (865) 368-1917.