On December 15, 2021, the Federal Open Market Committee (FOMC) of the Federal Reserve System made a significant shift in monetary policy in response to rising inflation. The Committee accelerated the reduction of its bond-buying program in order to tighten the money supply and projected three increases in the benchmark federal funds rate in 2022, followed by three more increases in 2023. Both steps were more aggressive than previous FOMC actions or projections.1
To understand how these steps might affect the U.S. economy, investors, and consumers, it may be helpful to take a closer look at the FOMC’s tools and strategy.
Jobs vs. Prices
As the nation’s central bank, the Federal Reserve operates under a dual mandate to promote price stability and maximum sustainable employment. This is a balancing act, because an economy without inflation is typically stagnant with a weak employment climate, while a booming economy with plenty of jobs is susceptible to high inflation.
The FOMC, which is responsible for setting monetary policy in line with the Fed’s mandate, has established a 2% annual inflation target based on the personal consumption expenditures (PCE) price index. The PCE index represents a broad range of spending on goods and services and tends to run below the more widely publicized consumer price index (CPI). The Committee’s policy is to allow PCE inflation to run moderately above 2% for some time in order to balance the periods when it runs below 2%.
PCE inflation was generally well below the Fed’s 2% target from May 2012 to February 2021. But it has risen quickly since then, reaching 5.7% for the 12 months ending in November 2021 — the highest level since 1982. (By comparison, CPI inflation was 6.8%.)2-3
Fed officials, along with many other economists and policy makers, originally believed that inflation was “transitory” due to supply-chain issues related to opening the economy. But the persistence and level of inflation over the last few months led them to take corrective action. They still believe inflation will drop significantly in 2022 as supply-chain problems are resolved, and project a PCE inflation rate of 2.6% by the end of the year.4
The Fed’s Toolbox
The FOMC uses two primary tools in its efforts to achieve the appropriate balance between employment and prices. The first is its power to set the federal funds rate, the interest rate that large banks use to lend each other money overnight in order to maintain required deposits with the Federal Reserve. This rate serves as a benchmark for many other rates, including the prime rate that commercial banks charge their best customers. The prime rate usually runs about 3% above the federal funds rate (see chart) and acts as a benchmark for rates on consumer loans such as credit cards and auto loans. The FOMC lowers the funds rate to stimulate the economy to create jobs and raises it to slow the economy to fight inflation.
The Fed’s second tool is purchasing Treasury bonds to increase the money supply or allowing bonds to mature without repurchasing in order to decrease the supply. The FOMC purchases Treasuries through banks within the Federal Reserve System. Rather than using funds it holds on deposit, the Fed simply adds the appropriate amount to the bank’s balance, essentially creating money out of air. This provides the bank with more money to lend to consumers, businesses, or the government (through purchasing more Treasuries).
Shifting from Extreme Stimulus
When the economy shut down in March 2020 in response to the COVID pandemic, the FOMC took extraordinary stimulus measures to avoid a deep recession. The Committee dropped the federal funds rate to its rock-bottom range of 0% to 0.25% and began a bond-buying program that reached an unprecedented level of $75 billion per day in Treasury bonds. By June 2020, this was reduced to $80 billion per month and remained at that level until November 2021, when the FOMC decided to wind down the program at a rate that would have ended it by June 2022.5-6
The December decision accelerated the wind down, so the bond-buying program will end in March 2022, at which point the FOMC will likely consider raising the federal funds rate. Although it’s not certain when an increase will occur, the December projection is that the rate will be in the 0.75% to 1.00% range by the end of 2022 and the 1.50% to 1.75% range by the end of 2023.7
Rising Interest Rates
The Fed’s current plan is aimed at slowing inflation by returning to a more neutral monetary policy; this represents confidence that the economy is strong enough to grow without extreme stimulus. If these are the only actions required, the impact may be relatively mild. And the first rate increase will likely not occur until the spring.
Even so, rising interest rates make it more expensive for businesses and consumers to borrow, which could impact corporate earnings and consumer spending. And rates have an inverse relationship with bond prices. As interest rates rise, prices on existing bonds fall (and vice versa), because investors can buy new bonds paying higher interest.
On the other hand, higher rates on bonds, certificates of deposit (CDs), savings accounts, and other fixed-income vehicles could help investors, especially retirees, who rely on fixed-income investments. Brick-and-mortar banks typically react slowly to changes in the federal funds rate, but online banks may offer higher rates.8
As 2022 begins, inflation is a far greater concern than rising interest rates, and it remains to be seen whether the Fed’s projected rate increases will be enough to tame prices. For now, it may be best not to overreact to the policy shift and maintain an investment portfolio appropriate for your long-term goals.
Have a fantastic weekend.
U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest. The principal value of all bonds fluctuates with market conditions. Bonds not held to maturity could be worth more or less than the original amount paid. The FDIC insures CDs and bank savings accounts, which generally provide a fixed rate of return, up to $250,000 per depositor, per insured institution. Forecasts are based on current conditions, subject to change, and may not come to pass.
Golf Tip of the Week
What do you do when you are in-between distances?
Learning to take yards on or off the distance you hit each club is an important skill. If you don’t have it, then the only time you will get close is when you are at exact distances from the pin with each of your clubs. The odds of that happening are not very likely, so you need to be able to make adjustments in order to give yourself options. Below are clues to help you decide between hitting a hard shot with a shorter iron or a soft shot with a longer one.
Hit The Longer Club If…
- The hole plays uphill
- The wind is in your face
- There’s trouble short.
Plus, make sure the distance you’re sitting at is to the pin, not the center of the green. If you only know the distance to the center, play the longer club if the pin is in the middle or back of the green.
Hit The Shorter Club If…
- The hole plays downhill
- The wind is at your back
- There’s trouble long
- If you only know the distance to the center, play the shorter club if the pin is in the front of the green.
To add or subtract 5 yards off that club you need to incorporate the following techniques.
How To Add 5 Yards To An Iron
Step 1 – Play the ball just back of center and lean the shaft forward. This will de-loft the clubface, turning your 7 iron into a 6 ½ iron.
Step 2 – Make a full backswing. From the top, feel like you’re about to pinch the ball between the clubface and the grass, as opposed to picking it off the turf.
Step 3 – Be sure to accelerate to a full finish.
How To Subtract 5 Yards From An Iron
Step 1 – Play the ball forward, more towards your left heel, and set your hands directly above the ball.
Step 2 – Make a ¾ backswing, so your hands reach about shoulder height.
Step 3 – Swing to a ¾ finish on the follow through, but make sure to fully turn toward the target. Because you are not making a full turn, be sure to keep an even tempo in your swing. It’s easy to rush in the backswing or downswing on less than full shots. So think “Smooth” when you execute the ¾ shot.
Another “Key Point” to remember. When hitting your longer club, choke down an inch or two on the handle when taking your grip, it shortens the club making it easier to control. If you keep this in mind next time you’re faced with shots that are in-between your normal distances, you will find that you will be able to better handle the situation. This is a great tip to practice next time you visit the practice range, having the skill to execute these shots will give you a world of confidence on the course.
Tip adapted from golftipsmag.comi
Recipe of the Week
Sparkling Winter Sangria
2 Smoothies
INGREDIENTS
- 1 cup frozen mango chunks
- juice of 1 lemon
- 1/2 teaspoon ground turmeric
- 1/4 teaspoon ground cayenne pepper
- 3/4 cup fresh squeezed orange juice
- 2 teaspoons fresh grated ginger
- 1 small raw red beet, chopped
- 1 cup frozen raspberries
- 1 cara cara orange, blood orange, or grapefruit, peeled and segmented
- 1/2 cup pomegranate juice
- honey to taste (optional)
INSTRUCTIONS
1. In a blender, combine the mango, lemon juice, turmeric, cayenne, ginger, and orange juice. Blend until completely smooth, adding more honey if needed to sweeten. Pour into a tall glass
2. Rinse the blender out. Combine the beets, raspberries, orange, and pomegranate juice. Blend until smooth and creamy, adding more pomegranate juice if needed to reach your desired consistency. Pour over the mango mixture and stir gently to swirl. Top with seeds, if desired.
Recipe adapted from halfbakedharvest.comii
Health Tip of the Week
7 Home Remedies for Sinus Infections That Actually Work
Don’t deal with sinus pressure any longer than you need to.
“Sinus infections occur when bacteria, allergens, or other irritants cause the lining of the sinuses and nasal cavity to become inflamed, which can obstruct the drainage pathway for the mucus that’s naturally produced in the sinuses,” says Abbas Anwar, M.D., an otolaryngologist (ENT) at Providence Saint John’s Health Center in Santa Monica, CA. “As that mucus builds up, it can become infected.”
Typical symptoms of a sinus infection include facial pressure and pain around your nose and eyes, post-nasal drip, and nasal congestion/stuffiness—basically, the perfect recipe to make you miserable.
In most cases, sinus infections are viral, says Dr. Anwar. Treatment typically includes over-the-counter products like Flonase, a nasal steroid, Sudafed, an oral decongestant, and pain relievers like Tylenol, he adds, and most symptoms usually resolve in about one to two weeks.
But you may have a bacterial infection if your symptoms don’t improve after around seven days. “At this point, I suggest visiting a doctor as you may need an antibiotic to help fight off the sinus infection,” Dr. Anwar says.
In the meantime, try one of these at-home remedies for sinus infections to relieve the worst of the symptoms.
- Stay Hydrated
- Try a Nasal Rinse
- Take a Steamy Shower
- Use a Warm Compress
- Turn on a Humidifier
- Try Aromatherapy
- Elevate Your Head at Night
Tip adapted from shape.comiii
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Sources:
1, 4, 6–7) Federal Reserve, 2021
2) U.S. Bureau of Economic Analysis, 2021
3) U.S. Bureau of Labor Statistics, 2021
5) Federal Reserve Bank of New York, 2021
8) Forbes Advisor, December 14, 2021
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Ballentine Capital Advisors is a registered investment adviser. The advisory services of Ballentine Capital Advisors are not made available in any jurisdiction in which Ballentine Capital Advisors is not registered or is otherwise exempt from registration.
Please review Ballentine Capital Advisors Disclosure Brochure for a complete explanation of fees. Investing involves risks. Investments are not guaranteed and may lose value.
This material is prepared by Ballentine Capital Advisors for informational purposes only. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation or any particular security, strategy, or investment product.
No representation is being made that any account will or is likely to achieve future profits or losses similar to those shown. You should not assume that investment decisions we make in the future will be profitable or equal the investment performance of the past. Past performance does not indicate future results.
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i https://www.golftipsmag.com/instruction/mental-game/what-do-you-do-when-you-are-in-between-distances/
ii https://www.halfbakedharvest.com/immune-boosting-winter-citrus-smoothie/#wprm-recipe-container-57113/
iii https://www.shape.com/lifestyle/mind-and-body/home-remedies-for-sinus-infection
