Another Interest Rate Increase Is Probable

Most economists and market watchers are expecting the Federal Reserve to increase their market making Fed Funds Rate by another 25 basis points this afternoon. This increase would put the rate at between 5.25% and 5.5% which would be a 22 year high.

The problem becomes, what’s next?

The markets have roared back into Bull Market territory with the S&P 500 increasing 19% since the beginning of the year. This is happening as economists expect corporate earnings to come in flat.

Inflation was measured at over 9% last year with the most recent figure standing at 3%. That would bring the expectation of bad times ahead, because every period of disinflation since the 1940’s has resulted in a recession. That’s all the time, not just part of the time.

The job market is still incredibly strong with unemployment hitting a 53 year low earlier this year. It’s increased only slightly since, and shows no major signs of slowing down.

Consumer spending is also roaring along as Americans spend even more on retail goods. If anything, these increased expenditures may again raise the rate of inflation as competition for goods increases.

The Conference Board leading index recently decreased for the fifteenth month in a row which is a signal of slowing economic activity. The last time this metric decreased in this manner, our economy hit the 2007 recession.

The bond markets are also signaling a recession with traders demanding higher interest rates on two year versus 10 year notes. This means that buyers are expecting more difficult times in the short term than the long term.

Let me leave you with this.

I’m writing this to say that all of these mixed signals add up to one unmistakable fact. We aren’t out of the woods yet.

The chances of our economy having a soft landing are small. Very small. It’s possible, but a difficult feat by any measure.

We had a soft landing back in 1994, when Alan Greenspan was at the helm. His deft tuning of interest rates and money supply led to the only one recorded in recent history.

My message is one of caution. If you look at the overall economic data, almost everything points to hard times ahead. Just because the markets have roared back doesn’t mean that a recession isn’t probable.

Caution is still the obvious order of the day.

Be conservative in initiating new business plans. Stash your cash. Trim the fat. Be cautious in managing your enterprise.

The worst thing that will happen is that you back things up a few months. At least you won’t find yourself in a precarious situation if the economy drops out from under you.

No matter what happens, please realize that you aren’t in this thing alone. I’m right there with you. If we need to dig a hole and shoulder a weapon, we’ll get it done.

We’re all going to get through this. Let’s get through it together.

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Sincerely yours,

Chris Amundson
Accounting Solutions Ltd.

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