Financial advisors expect latest inflation data to cool Fed's jets

Financial advisors, characteristically not known for making rash decisions or succumbing to knee-jerk reactions, are soaking up the latest inflation data and generally acknowledging some shifting economic tides in the works.

“I think it means the higher fed funds rates are slowing inflation as desired, and the markets are progressing much as we expected, although it’s been better than we expected in 2023 thus far,” said Tim Holsworth, president of AHP Financial Services. “The slowdown in inflation also appears to lessen the chance we will see an all-out recession.”

Wednesday morning's report from the Bureau of Labor Statistics surprised some market watchers by showing consumer prices in June rose by 3%, which is the lowest inflation rate since March 2021 and below analysts' expectations of 3.1%.

As anticipated, the equity markets saw the news as a reason to rally and bond yields began pulling back, because the markets are taking the latest consumer price index data as a sign that the Fed might stop raising rates for a while.

“I don’t think the Fed should raise rates more from here, and the futures markets suggests a reduction in rates as early as September but I don’t think that’s going to happen,” said Joe Rinaldi, chief investment officer at Quantum Financial Advisors.

“Clearly, CPI is trending downward and that just confirmed the Fed has done what it was supposed to do,” he said.

The Federal Reserve held rates steady in June after a string of 15 consecutive hikes as it scrambled to tamp down the runaway inflation that resulted from the record level government stimulus spending during the Covid pandemic. Rinaldi is among those who believe the Fed should pause again in July.

“You want to make sure inflation is dead, but not at the cost of the patient’s life,” he said.

Jason Pride, chief of investment strategy and research at Glenmede, is less optimistic that the recent data point will “knock the Fed off its path of another rate hike in July.”

“Fed funds futures imply a 90% chance of a hike in July, but the prospects for a second remain up in the air,” Pride said. “Futures are calling for a 25% chance of a second hike by year-end, down notably from 38% yesterday.”

The equity markets might be jumping today and money-market funds might be trimming yields, but Chuck Failla, president of Sovereign Financial Group, is preaching calm.

“My core belief with regards to managing money is to have the time horizon, not daily news reports, dictate the allocation,” Failla said. “Specifically, I am a strong proponent of segregating short-term funds from long-term funds. By doing this, we have the luxury of not having to guess what the market will do in the short term.”

Applying that philosophy to the latest CPI numbers means Failla won’t be reacting Wednesday. However, he said, he is watching the status of the inverted yield curve, which historically has been a precursor to recession.

“Although history does not always repeat, it sure does have a habit of rhyming,” Failla said. “If I had to guess, I would say a recession of some kind is likely.”