No Pain, No Gain

September 22, 2022

On Wednesday, the US Federal Reserve issued yet another increase in the Federal Fund Rate, bringing it to 3-3.25%. (Note: you can read more detail on the meeting and the implied rate path here)

I listened to the press conference from Federal Reserve Chair Jerome Powell – and one phrase kept coming into my mind as he spoke. No Pain. No Gain.

It is no secret that inflation has been the main concern of the Federal Reserve in recent months (and investors and consumers like). For decades, the US experienced modest ~2% inflation and it was very beneficial, leading to several expansionary periods. Post-COVID and the unprecedented events not limited to monetary and fiscal stimulus and considerable disruptions to supply chains, inflation has simply gotten out of hand. Progress has been made and some areas are slowing – but it very much remains a dominant force in the economy and the Fed made it clear they will not stop until it retreats.

Jerome Powell made this clear, stating “we have got to get inflation behind us. I wish there was a painless way to do that; there isn’t”

What type of “pain” is Powell referring to? As I’ve written about in the past, the rising of Fed Funds rates will trickle down into other rates, making borrowing more costly (ie: painful). This can be clearly seen in mortgage rates that are now topping 6% on the 30 year. Other variable rate loans will also be impacted.

Beyond interest rates, there is a potential for job losses. Powell repeatedly stressed the strength in the job market and noted that employment will need to cool to ease pressure on prices (higher wages can get passed onto consumers via higher prices, and more wages = more cash in employees wallets to spend)

Growth may also slow and there is ongoing fear of a recession. This can have many painful implications for individuals and businesses alike.

And of course, there will be pain for investors. As the Fed has raised the Fed Funds Rate, yields across the curve has also risen exponentially. This has led to negative returns for both bond investors (as prices are inversely correlated to rates) and equity investors (as equity prices are a present value of cash flows and also negatively impacted by rising rates)

The pain is real and it will be felt to some degree by all of us.

Will the pain end? Yes. Although no one can definitively say when. Monetary policies (ie: raising of rates) have meaningful lags – so it is possible inflation may already be improving while they are still raising rates.

Is the pain worth it? It may not feel like it for many, but yes. While all these implications are things we’d rather avoid, none are as painful as the failure to act. Leaving inflation to become entrenched is exceptionally dangerous. It needs to be stopped before it becomes an expected part of our culture. As Powell said, “we want to act aggressively now, and get this job done, and keep at it until its done.” No pain. No gain.

We are all feeling the pain to some extent. I know it is not easy but it will prove to be temporary. Let’s get it done – and move forward.

Onward we go,

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