The Fed is likely to fail on inflation again by hitting the brakes too hard at its meeting next month and this could send the world’s largest economy into recession, which would have global implications.
Federal Reserve Bank of St. Louis President James Bullard has been reported as saying the U.S. central bank needs to move quickly to raise interest rates to around 3.5% this year with multiple half-point hikes and that it shouldn’t rule out rate increases of 75 basis points.
After failing to act in time, and with any vigor, the Fed is now fighting inflation that runs hot at 8.5% — the fastest pace for 41 years.
The Fed has already failed on inflation with its grand-scale inaction early on. It made a massive miscalculation by the most influential central bank.
It must not now fail again by hitting the brakes too hard at its meeting next month, and future ones, with excessive rate hikes, which could push the world’s largest economy not only into a short-term, but a longer-term recession.
This would not only be a huge issue for the U.S. but the global economy too. As the saying goes, ‘When America sneezes, the world catches a cold.’
A Lot on the Fed's Plate
There’s a real risk that oversized interest rate hikes would cause a recession, and they may not even slow inflation as the soaring prices are triggered by supply chain issues, the Russia-Ukraine war, and lockdowns in China causing new bottlenecks, amongst other issues, which the Fed’s hikes will not solve.
This is all enough to spook the Fed into a major policy mistake as it tries to recover some of its credibility after the previous lack of decisive action as inflation was beginning to take its stranglehold.
Against this worrying backdrop of looming recession, investors typically to move away from towards perceived "safe haven" assets, such as cash. But this also needs to be considered carefully in this environment.
Red-hot inflation means excess cash in your bank accounts will lead to losses in real value. Hardly a safe haven, then, for those wanting to build long-term wealth.
As the risks of a global recession ramp up, there remains one clear way for investors to maximise returns relative to risk: the practice of portfolio diversification.
However, last week I also warned that the 60/40 investment portfolio is not fit for purpose in today's sky-high inflation environment.
60/40 Portfolio Now Passe
For about half a century, investors have been able to create, grow and protect their wealth using the 60/40 portfolio model. 60% stocks and 40% bonds were enough to hit both goals of capital appreciation and capital preservation. This is no longer the case.
Investors should, therefore, consider diversifying into less traditional, return-enhancing asset classes.
Investors need to shore-up their portfolios to shield their wealth from another Fed policy mistake that could be enough to push the economy into a recession.
London-born Nigel Green is founder and CEO of deVere Group. Following in his father’s footstep, he entered the financial services industry as a young adult. After working in the sector for 15 years in London, he subsequently spent several years operating within the international space, before launching deVere in 2002 with a single office in Hong Kong. Today, deVere is one of the world’s largest independent financial advisory organizations, doing business in 100 countries and with more than $12bn under advisement. It specializes global financial solutions to international, local mass affluent, and high-net-worth clients. In early 2017, it was announced that deVere would launch its own private bank. In addition, deVere also confirmed it has received its own investment banking license.
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