Inflation Sticking Around as Fed Nears Another Rate Increase

 Inflation Sticking Around as Fed Nears Another Rate Increase

The U.S. Federal Reserve announced its second interest rate increase of the year today, after hiking rates in March and marking the sixth time since December 2015 that the central bank has raised its benchmark interest rate from the lows set during the worst economic collapse since the Great Depression of 1929-1933.

Long-Term Inflation Can Lead to Asset Bubbles

Inflation can lead to asset bubbles in a couple of ways. First, when inflation is high, people tend to spend more money since their money is worth less. This increased spending can lead to higher prices for assets, such as homes and stocks. Additionally, when interest rates are low, people may invest more in assets such as these, since they can get a higher return on their investment.

Asset Bubbles Lead to Recessions

We've seen it happen time and time again: an asset price bubble forms, it pops, and a recession quickly follows. It's no coincidence - when asset prices get too far ahead of themselves, it's often a sign that the economy is about to take a turn for the worse.

Consumers Hold Their Breath

As the Federal Reserve looks poised to raise interest rates for the fourth time this year, consumers are holding their breath. Many have already seen their credit card and mortgage rates rise, and another rate increase could put even more of a squeeze on budgets. Meanwhile, inflation has been slowly creeping up, leaving many wondering how much longer they'll be able to keep up with the rising costs of living.

Short-Term Impact on Equities

In the short term, another rate increase could have a negative impact on equities. This is because higher rates tend to lead to higher borrowing costs, which can put pressure on companies' profits. In addition, higher rates can also make it more difficult for consumers to afford big-ticket items like homes and cars. However, it's important to remember that the Fed only raises rates when the economy is doing well, so this move should be seen as a positive sign.

Currencies and Commodities Rebalance

Over the past few months, we've seen a lot of movement in the commodities and currency markets. The US dollar has been on a tear, while commodities have been mostly weak. However, we've seen a bit of a reversal in recent weeks with commodities starting to rebound while the dollar has weakened. This is likely due to the fact that inflation is still sticking around despite the Fed's attempts to raise rates.

Governments Bolster Deficits

The U.S. government is projected to spend $984 billion more than it takes in this year, an increase from last year’s $779 billion deficit. The deficit is projected to grow to $1.08 trillion by 2019 and exceed $1.5 trillion by 2028. The Trump administration’s tax cuts and increased spending are the main drivers of the rising deficits.