Central bank tightening sparked recession fears.
Last week, the Federal Reserve (Fed) raised the federal funds rate for the fifth time this year. During 2022, the Fed has lifted its benchmark rate from near zero to 3.12 percent. Fed policymakers indicated that they expect to raise the rate again this year. That’s going to make borrowing more expensive as rates on credit cards, home mortgages and business loans increase.
Frankly, that’s the Fed’s goal. It wants to tamp down consumer and business spending. When spending falls, demand for goods and services falls and so do prices. Lower prices mean lower inflation. Unfortunately, inflation has a long way to fall. The Fed’s inflation target is two percent. In August, the Consumer Price Index showed inflation was 8.3 percent.
The Fed isn’t the only central bank hiking its country’s rate. “We are experiencing one of the most synchronized bouts of monetary and fiscal tightening in the past five decades,” reported Daniel Moss of Bloomberg. Ninety central banks have raised rates during 2022.
“The relentlessness with which central banks are increasing interest rates reflects alarm at rising prices — and an aversion to being portrayed as insufficiently courageous at a time of economic peril. With so much hiking, officials should fret about the broader impact of the course they are on. The recession they are courting may be no ordinary downturn.”
The possibility of a global recession was top of mind for investors last week. Major U.S. stock indices dropped lower, and yields on U.S. Treasury yields reached multi-year highs.
In times like these, people often worry about how to protect the wealth they have accumulated. In the investment industry, we say that past performance is no guarantee of future results; however, during market downturns, it can be reassuring to consider current market events within the context of long-term market events.
A chart of the performance of the Standard & Poor’s 500 Index shows that the path of investing is rarely smooth and upward. Bull markets follow bear markets with corrections along the way. The accumulation of evidence over time supports the idea that staying the course is a sound choice during market downturns. It takes patience and discipline, and it can be particularly difficult to do during times like these.
