- With U.S. inflation at a four decade high, the Federal Reserve is playing catch up tightening monetary policy.
- The key issue is whether it can avert recession or stagflation while also contending with the fallout from Russia’s invasion of Ukraine.
- Our take is the U.S. economy will be resilient this year, but the risk of economic weakness would increase next year if inflation stays elevated.
- Meanwhile, we are maintaining a moderate overweight position in risks assets while being prepared to scale back if conditions worsen.
Financial Markets Turn Volatile
|STOCK MARKET||2021||Mar. 31, 2020 - Dec. 30, 2021||Q12022|
|U.S. (S&P 500)||28.68||89.48||-4.60|
|International (EAFE $)||11.87||56.93||-5.77|
|Emerging Markets (MSCI $)||-2.36||51.81||-6.99|
|U.S. BOND MARKET||2021||Mar. 31, 2020 - Dec. 30, 2021||Q12022|
Source: Bloomberg. For informational purposes only. Frank Russell Company (FRC) is the source and owner of the Russell Index data contained or reflected in this material and all trademarks and copyrights related thereto. The presentation may contain confidential information pertaining to FRC and unauthorized use, disclosure, copying, dissemination, or redistribution is strictly prohibited. This is a Fort Washington Investment Advisors, Inc. presentation of the Russell Index data. Frank Russell Company is not responsible for the formatting or configuration of this material or for any inaccuracy in Fort Washington’s presentation thereof. You cannot invest directly in an index.
Can the Fed Avert a Recession or Stagflation?
|Real GDP Growth||2.8||2.2||2.0|
|Core PCE Inflation||4.1||2.6||2.3|
Source: Board of Governors of the Federal Reserve System.
The risk, therefore, is that interest rates may need to rise by more than the Fed and bond investors currently anticipate if inflation stays well above the Fed’s average annual target of 2%.