In over three hours of testimony on Wednesday this week, Federal Reserve Chair Jerome Powell made the fight against inflation his top priority over the risks from Russia’s invasion of Ukraine, backing a quarter point interest rate rise later this month. He set the stage for future interest rate increases by stating “To the extent that inflation comes in higher or is more persistently high than that, then we would be prepared to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings.”
As the war in Ukraine deteriorates, it is almost a given that higher energy and commodity prices resulting from the conflict will make the inflation problem worse in the short run. As the impact of Ukraine and the sanctions become more apparent, the long term problem will be more pronounced with continued inflation and curtailed growth.
In the meantime, the White House is asking for further infusion of funds into the COVID program. Nearly a year after passage of the $1.9 trillion American Rescue Plan, the administration says the Federal government has nearly used up the money dedicated directly to COVID-19 response. The White House told Congress it was preparing to seek a further $30 billion for additional COVID-19 funds coupled with $10 billion to provide support to Ukraine.
The stock market is clearly confused with these mixed messages of fighting inflation. When uncertainty rules in Wall Street, sell off across the board is what happens.
Future Wealth’s View
While COVID subsidies over the past two years were no doubt necessary, the continued pumping of government money into subsidizing COVID shots, antibody treatments, preventative pills for the immunocompromised and to fund community testing sites are only going to continue to drive up inflation. We, at Future Wealth, ask “Is it not time for consumers to begin to pay for these tests and make their way to clinics to get them?”. Every school parking lot now has a COVID test center with staff sitting idly for hours waiting for a handful of people to come and get tested. And the government wants to continue funding this for how long? Every dollar that the government is saving for the consumer by giving them free shots and tests, translates into free money for the consumer to buy a $40 pizza that should be priced at $25 under normal circumstances. And then the Ukraine factor makes it even more complicated to control inflation when oil prices having hit record highs, looks to climb even higher.
We believe that inflation will remain high throughout 2022. There is a school of economists, the Fed included, who seem to view 25 basis point hikes as a panacea to curing the inflation problem. However, until the government shuts down this socialism experiment, we cannot see how inflation will be back down to low single digit levels from the current inflation reading of 7.5%.
By the middle of the year if inflation continues to hover around 6-7% despite repeated interest rate increases by the Fed, investors better watch out. The stock market sell off seen in the past few months will look like a walk in the park.