Get ready for a year of rising interest rates, precipitated by the Federal Reserve as a way of fighting off inflation, and bolstered by a bevy of financial press and investor reports.
Goldman Sachs expects the Federal Reserve to enact four interest rate hikes this year but thinks more are possible due to the surge in inflation, reports CNBC (1-23-22).
Accelerating inflation could cause the Federal Reserve to get even more aggressive than economists expect in the way it raises interest rates this year.
“Our baseline forecast calls for four hikes in March, June, September, and December,” Goldman advises clients. “But we see a risk that the [Federal Open Market Committee] will want to take some tightening action at every meeting until the inflation picture changes.”
Great Lakes Business Credit CEO Rhett B. Rowe has seen first-hand how the conditions are changing since last summer and strongly urges that backup finance planning be considered during these turbulent times.
According to The Economist Magazine (Feb. 5-14 issue), as inflation spikes “there is a growing sense that the Fed has lost its way. It looks as if it is about to make an abrupt change of course by tightening monetary policy hard and fast.”
The magazine reported that surging prices over the past 18 months have come as a “rude surprise” to the Fed and other central banks.
“In America consumer-price inflation has reached 7% (update: 7.5% through January) and, far from being transitory, is feeding through into wages as the idea that bills will go up is being baked into households’ and firms’ expectations. Private-sector wages and salaries in America are up 5% in a year. In December, the median American consumer expected prices to rise by 6% over 12 months. Many of these trends are being felt around the world: global inflation has now reached 6%.,” the magazine reports.
For months, the Fed has been stimulating an economy that is already red hot by buying bonds and keeping interest rates at 0-0.25%.
The Fed says it plans to get interest rates back to about 2% by 2024, not far off most estimates of their neutral level, which in theory neither stimulates the economy nor holds it back. But as the Fed has dragged its feet, the risk has grown that it will have to go further. Higher inflation expectations make the impulse to raise prices harder to eradicate.
The Economist concludes, “The most likely prospect is therefore of a year or more of interest rates in America rising more sharply than the Fed has so far indicated. Some forecasters predict that it will raise rates by 1.75 percentage points in 2022, more than in any year since 2005.”
Rowe said that last summer economists suggested inflation would subside and the prospect of a Fed rate hike becomes more distant.
“The latest news suggests businesses begin to seek new, non-bank lending resources in the event the Fed drives up interest rates up and traditional lending sources become less attractive, or worse, unavailable to them,” he explained.
Rowe believes strongly that it is “always wise to have a secure backup financing source during ever-changing economic conditions.”