A key measure of U.S. inflation published earlier this week showed signs of moderating in March, with the Consumer Price Index (CPI) climbing 5% compared to last year, slowing from an annual pace of 6% seen in February. However, core CPI, which excludes volatile food and energy prices, rose 5.6% Y/Y. Fed staff also projected a “mild recession” starting later this year. Bets are increasing that the central bank will go for another 25 basis points on May 3, bringing the Fed Funds Rate above 5% for the first time since the lead up to the Global Financial Crisis.

When it comes to the global economy, two questions bubble to the surface these days: When will central banks end their rate-hiking campaigns, and what other drama might unfold before they do? It’s a mess out there, and finding a unified signal from markets has rarely been harder. And investors keep pouring cash into money market funds. About $350 billion flowed into them in the four weeks ending April 5—pushing money market assets to a record $5.25 trillion.

Future Wealth’s View

Concerns about inflation appear to be taking a back seat behind worries that the economy is moving closer to recession. As the Fed continues with its monetary policy tightening, the health of the labor market becomes increasingly significant. By striking a balance of labor supply and demand, the Fed can move one step closer to a soft landing. But that is becoming increasingly unlikely as energy prices soar, goods demand declines and lending standards are tightened.

Consumers who have pent-up demand for travel and entertainment following Covid-19 lockdowns may be willing to dismiss higher gasoline prices and continue to accelerate their spending. But, disposable income, even when supplemented with consumer debt, has its limits. As we enter the Q1 2023 earnings season, all eyes will be on the banking sector – JP Morgan, Wells Fargo and Citigroup echoed the prospect of a mild recession in the next couple quarters, in their earnings call earlier this week. The commentary from the regional banks will be closely watched given the recent crisis stemming from the collapse of Silicon Valley Bank (SVB).

“If you owe the bank $100, that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.” It’s a famous quote attributed to industrialist John Paul Getty, but has been applied to many scenarios and across many sectors.