Out of the Frying Pan… 

The Fed raised interest rates last week, the last cut of seven this year meant to curb 40-year-high inflation. The benchmark federal funds rates stood at near zero in March. With this last raise of 0.5%, it now stands at a 15-year high of 4.25% to 4.5%.

The federal fund rate affects borrowing costs for businesses and consumers – everything from credit cards to auto loans to mortgages. Raising the cost of borrowing typically slows the economy, reducing profits and driving up unemployment. Nobody likes inflation. But what voters really don’t like is an all-out recession.

It’s a tough problem for the Biden Administration, something they would very much like to get control of before the 2024 election. To bring down inflation, Powell must hang tough and continue to raise rates in 2023. But every tick up puts the economy that much closer to a serious recession.

Unemployment is rising. The GDP is slowing down. If that continues, the administration will do everything it can to pressure Powell into reversing course. But if he does, inflation will spike. Either way, the Republicans and Fox News will blame it on the Democrats.

It will be interesting to see how this plays out. And to figure out an investment strategy to respond to it.