It’s Time to Step Up!!!!
Last Wednesday the Labor Department released their Consumer Price Index (CPI) data and while these data were in line with expectations (maybe a little better), there is a continued expectation for rates to increase another 25bp at the next Federal Reserve meeting. Year over year numbers suggest core inflation around 5.6% which is still a far cry from the Fed’s 2% target, but month over month data suggesting 0.1% is actually quite exciting as it is down from 0.4% a month ago.
Will this be a one-month phenomenon, or are we actually taming inflation? It’s very difficult to know for sure, but the Federal Reserve seems VERY committed to making sure that inflation is tamed. In fact, in the release of the most recent FOMC Committee minutes, it was clear that the Fed believes there will be a recession in 2023 and that it will be caused by a banking crisis. What can and mostly will help trigger that crisis is further tightening of Fed policy. Chairman Powell has regularly said that he thinks the banking system is strong, but it does appear that he is willing to cull the heard.
The timing of this is interesting to us as we see a number of potentially distressing issues coming to the fore late in 2023. Student loan debt must restart within 60 days of June 30th, there is a wall of Commercial Mortgage Backed Securities (CMBS) that must be refinanced later this year as well. Earnings are likely to be lower for businesses across the board, and fund raising, whether debt or equity will be difficult for new ventures. It’s not pretty and the Fed still seems determined to raise rates into this.
While the news can be depressing on its face, there are two items we like to hang our hat on outside of rates:
1. Through economic struggle comes great investment opportunities (and you know that we’re looking every minute of every day).
2. The US Government could finally smarten up and send employees back to the office. While this may cause some short-term angst among workers, it would reinvigorate the cities and towns around these offices. Further, this would encourage other businesses that are leaning heavily into WFH to do the same. Should this occur in time, the CMBS refinancing issues would be diminished significantly, and this would take a lot of pressure off the banking system. It’s time to step up and go back to the office!!!
Sources: Wall Street Journal, CNBC, Student Aid, MSCI