A Wealth of Common Sense: Waiting for the Coast to Clear on Inflation
Over the past few years, traders and investors have had to exercise patience with the Federal Reserve. As the central bank started to raise interest rates, expectations for how high rates would go kept rising.
Once rates peaked, predictions for how long rates would stay high also kept getting pushed out. Now, we’re on the cusp of seeing the first interest rate cuts in over four years. That could occur as early as September.
The reason for the potential rate cut is that inflation data continues to decline. It’s not quite at the Fed’s target rate level. But if the bank waited for that target to hit, it would likely overshoot and risk deflation.
That’s because monetary policy has a lag period. It can take as long as 18 months for a change to fully ripple throughout the economy.
Meanwhile, there remain comparisons to the 1970s. The 1970’s saw a burst of inflation, which then declined, only to be followed by a second burst of inflation.
Conditions aren’t likely to create a second burst right now. But a recession or pandemic, followed up with massive amounts of money-printing, could cause a resurgence.
Given that bear markets end while the data is still ugly, the bull market should be no surprise. Those waiting to see if a second round of inflation will hit will likely miss out on substantial gains in the stock market.