Simply Bitcoin: Inflation Has Peaked
Asset valuations have dropped thanks to rising interest rates, which raise the cost of capital. But inflation has also been a factor for the drop in stock prices. That’s because companies make decisions based on the purchasing power of the dollar. Rising inflation rates create more uncertainty as to that value.
With inflation starting to come down on a year-over-year basis, it can become easier for companies to engage in long-term planning. That’s true even if borrowing costs remain higher.
The Federal Reserve has indicated that they won’t cut interest rates in 2023. But their decision to slow the pace of rate hikes in December 2022 suggests that they will stop raising rates at some point this year.
As that happens, markets will see reduced uncertainty over how high rates will go. And if inflation continues to drop, there will be a solid tailwind for investors, likely in the second half of the year.
That said, if the Fed pauses while inflation is still higher than average, we could see higher inflation down the line. The Fed’s target rate of 2 percent is a challenge to hit without stalling out the economy into a recession. So, the central bank may err on the side of higher inflation.
However, if we’re past the worst of the inflation this decade, asset prices should expect to make a recovery in time.