Inflation in the United States has moderated in April, which could cause the Federal Reserve (Fed) to pause its cycle of interest rate hikes in June. But don’t get your hopes up about rate cuts any time soon, because inflation is still too high for the Fed. The pause is not guaranteed, although it is quite likely. The markets see it as something positive. It’s not a cut, but it’s a relief. However, there is still a lot of uncertainty. The banking crisis, the risk of default on Treasury bonds and the possibility of a recession. Anyway, this story is not over.
Inflation is like a monster that breaks out of the cage. Even if we give him a few shovels, we can’t claim victory yet. Because This fight is not easy or fast. This is not to say that there are no reasons to be happy. There are, and many. We also don’t want to say that we can’t beat the monster. Sure we can. What we mean is that let’s not sell the bear’s skin before hunting it. It must be borne in mind that this fight against inflation can become uglier and more complicated than we think.
Could it be that the market has its feet on the ground? It seems not, because we have spent many months on this up and down between joy and sadness. Investors believe that inflation is going to go away soon and that central banks are going to change course. Not that that’s a lie at all. But yes it is a tremendous exaggeration. All it takes is for oil to drop a little for inflation to also drop a little. And then the market begins to celebrate as if it were a new year. And he gets so excited that he starts shopping like crazy thinking we’re about to get out of trouble. Mistake. These advances are good, but not enough. We still have a lot of cloth to cut. It will not be easy to reach 2%. In other words, it won’t be a matter of months.
Investors must look to the future. I mean, it’s all a game of expectations. If investors believe that tomorrow will be better than today, they turn bullish. The situation of the moment passes into the background. What really matters is the prognosis of improvement. And that is why that pause is celebrated so much. We all know that a pause is not a return to those days when the Fed made money fall from the sky. But a pause is better than a rise. In this sense, the change is received with optimism.
But be careful, optimism can be dangerous. Especially if it makes us lower our guard and forget the risks that still lurk. Because the inflation monster is not going to give up so easily. He has many allies who can help him escape again. The repressed demand that can trigger consumption. Or the geopolitical tensions that can make raw materials more expensive. Or the inflationary expectations that can feed the vicious circle of prices and wages. These are just some examples of the traps that we can find along the way. That’s why IIt is better to be prudent and not trust ourselves too much. Inflation is a cunning and persistent enemy. We can’t take him for dead until we see him buried.
After looking at the inflation data for April, the Fed surely has a clearer way forward. AND that path is probably that of the pause. That is, keep interest rates between 5 and 5.25% for a while. And then what? Well, that will depend on how inflation evolves. If inflation continues to decline at an acceptable rate, the pause may be extended. And that would be good news for the markets and the economy. But if inflation resists lowering or rises again, the Fed will have no choice but to resume hikes. And that would imply reaching 5.5%, 6% or more. And that would be bad news for the markets and the economy. So Let’s cross our fingers that inflation behaves well and lets us enjoy the break for a while.
The big mess we have now is the job market that is raising the cost of services. Food and energy prices have dropped. For months, these achievements have been the ones that have made the front pages. And, to a large extent, those who have encouraged the market to think that we can with inflation. But let’s not get our hopes up, this can be more complicated than we think. In other words, we may run into more obstacles as we approach 4%. The shortage of employees in many services can be a tough nut to crack for some. AND that can make inflation stubborn and not go down or even go up. So let’s not relax too much, the inflation monster may be lurking.
So what can we do to prevent the inflation monster from giving us a scare? Well, the first thing is to pay attention to the data that comes to us every month. Not only those of inflation, but also those of employment, consumption, trade and other economic indicators. This way we will be able to anticipate possible changes in course by the Fed and the markets. The second is to diversify our investments and not put all our eggs in one basket. This way we can protect ourselves from possible fluctuations in prices and interest rates. And the third thing is to be patient and not let ourselves be carried away by panic or euphoria. Inflation is a complex and variable phenomenon that requires time and analysis to understand and combat. We cannot expect it to be resolved overnight. Nor that it becomes our worst enemy.
To face the future, we must be informed, diversified and serene. So we can adapt to changes and take advantage of opportunities. Inflation and uncertainty surrounding future Fed decisions are a challenge, but not an insurmountable threat.
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