SPXT - Rates Higher For Longer
2023-05-31 12:05:00 ET
Summary
- An acceleration of economic activity in the service sector would be most welcome under normal circumstances.
- Strength in the service sector is making the Fed’s inflation fight harder. The Fed has to take interest rates higher for longer if it wants to maintain the credibility of the 2% inflation target.
- We’re continuing to hold some cash reserve in the US Equity ETF portfolio. Of course, that could change at any time.
An acceleration of economic activity in the service sector would be most welcome under normal circumstances. It means more employment, more broadly defined growth in America, more absorption of the excess labor force, more closure of the gap between job seekers and job openings, and lots more. So why aren’t we cheering loudly?
Strength in the service sector is making the Fed’s inflation fight harder. The Fed has to take interest rates higher for longer if it wants to maintain the credibility of the 2% inflation target. Alternatively, the Fed could accept a higher target of 3% or 4%. Many commentators are suggesting that the Fed should do that.
I’m taking the other side of this argument. The Fed has maintained credibility by insisting that the 2% inflation target is intact. Fed spokeswomen and spokesmen have repeatedly confirmed the target. So far, not a single member of the Federal Open Market Committee ((FOMC)) has wavered in this commitment. Note that the Fed has remained consistent during a banking system crisis and during a protracted and disruptive politically motivated debt ceiling debate that has already cost our country billions.
Why anyone believes that this Fed will back away from the 2% target is beyond me.
Our outlook is for interest rates to be higher for longer. Add to that the fact that the US Treasury must issue nearly $1 trillion of net new Treasury bills, notes, and bonds once the farcical debt ceiling debate is over. The near-term pressure for higher interest rates is clearly operational.
Markets may wish for a Fed pivot, but we believe that hope is not a strategy. We’re continuing to hold some cash reserve in the US Equity ETF portfolio. Of course, that could change at any time.
We close with the link to the recent S&P Global Flash US Composite PMI™ report on the robust improvement in the service sector. It’s well worth the four minutes required to read it:
“US output growth hits 13-month high in May but divergence widens between manufacturing and services”.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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Rates Higher For Longer