The push to contain inflation will continue

Advisors brace clients for continued volatility

All eyes this week are focused on Wyoming as central bank leaders from across the world meet to discuss economic policy at the Jackson Hole Economic Policy Symposium.

The Chair of the US Federal Reserve, Jerome Powell, warned that the central bank’s plans to bring inflation back down to its two percent goal would come at a cost and burden those least able to afford it.

“Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth,” Powell said in a speech Friday. “Moreover, there will likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”

Powell noted that the campaign the central bank has laid out to restore stability is rooted in lessons in the past. First, it is the central bank's job to take responsibility for delivering low and stable inflation. Second, the public's exceptions about future inflation can play an essential role in setting the path of inflation. It will if the public thinks prices will come down, barring major economic shocks. If the public thinks things are out of control, that feeds into the psyche and the broader economy.

According to Chairman Powell, the final lesson is that we must keep at it until the job is done because any delay is likely to increase inflation.

The Feds have raised interest rates three times this year. The most recent was in June by 0.75 of a percentage point to a range of 1.5% to 1.75%. Since the Fed’s last meeting in July, inflation has eased. In July, the consumer price index was 8.5%, down from 9.1% in June.

As the markets consistently go up and down, Jon Shore, managing director of Shore Group Advisors, a Florida-based financial services firm, said the new issue is second guessing your long-term investment strategy.

Shore told Advisors Magazine that he keeps his clients focused on long-term goals and remembering their specific financial plans.

Jon Shore“We put our values in front of our decision making; when doing that, our “why” we invest becomes more intentional and less about the current news cycle – couple this with the smart money philosophy making sure you have a smart place to make money when you need it so which might mean beefing up your emergency funds,” Shore said.

US markets reacted swiftly to the Chairman's speech hinting at more aggressive rate hikes. The Dow declined 3%, S&P 500 fell 3.3%, and the Nasdaq was down 3.9% at the close of the day.

Following the Chairman’s speech, some were asking, even if inflation goes down just a little, why would the Fed continue raising rates?

Economist and former chief executive officer of the Federal Reserve Bank of New York William C. Dudley who served during the Obama Administration said getting a little done wouldn't do the job.

“Because getting inflation down to 4% is not getting the job done,” Dudley said in an interview with Bloomberg. “If the Fed quits, let's say, with inflation at 4%, inflation expectations will become anchored, and then the Federal Reserve will just have to do more in the future.”

Given Chairman Powell’s belief that the central banks still have more work to do, some financial advisors are continuing to prepare their clients for a volatile market.

Brook ScardinaBrook Scardina, managing partner, capital markets and investments at Michigan-based Oak Real Estate Partners, has been preparing his clients for such aggressive actions by the Feds.

The company’s investment process incorporates a proactive approach to anticipating best-case and worst-case market scenarios.

“As a result, we have already begun to discount between 5%-7.5% of the modeled exit values of the properties,” said Scardina. “This, coupled with the low loan-to-value, provides a high margin of safety against the permanent impairment of capital, which protects the underlying investor. Our assumptions and institutional level underwriting are designed for a 2008-type of market environment.”

Regarding the Feds, Scardina believes the trend of rate hikes will continue until it is in a position requiring it to cut rates based on slower economic growth and a recessionary climate.

Dave Clayman 1According to David Clayman, Co-founder, and CEO of Twelve Points Wealth Management, a Massachusetts-based financial services firm, inflation is close to peaking, and prices will ease. Clayman advises his clients to have a line of credit for the business and six months of operating cash available.

“This line will protect them if the US economy enters into recession and they need to cut expenditures to make it through to the other side,” Cayman said. “The line could also provide them with an opportunity to acquire competitors who were not so well prepared, allowing our clients to come out of any potential recession bigger and stronger than they are now.”


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