Is the Fed steering U.S. into a recession?

Advisor believes it's time for Canada and U.S. to pause and see impact of hiking cycle

Is the Fed steering U.S. into a recession?

The Federal Reserve’s 75 basis points interest rate increase yesterday wasn’t a surprise to financial advisors, but the speed at which it is still hiking has raised concerns for some.

“I was really hoping they weren’t going to raise it too quickly,” Julie Shipley-Strickland, the Calgary-based senior wealth advisor with Wellington-Altus Private Wealth, and the principal and founder of Julie Shipley-Strickland Wealth and Risk Management, told Wealth Professional.

“The benchmark rate for the Fed right now is 3.25% and it’s 3.5% for Canada. Can we run an economy and a society at that rate? I think so. But, I am really disappointed. I was hoping they were going to take their time with it. I understand that inflation needs to be ‘brought under control,’ though everyone has a different definition of what that means. But, the reason I don’t want them to raise the rates so quickly is because inflation is a lagging indicator. It takes some time before you see the effect of rising interest rates on inflation. So, by continuously raising them too fast, I don’t feel like we’re getting time to see the effects on the inflation.”

The Federal Reserve raised its target interest rate on Wednesday by 75 basis points to a range of 3% to 3.25% and signalled more large increases to come. It indicated that its policy rate could be 4.4% by year-end and top out at 4.6% in 2023 as it continues to battle inflation. That means another 1.25% increase from the Fed’s two remaining policy meetings in 2022, so there could yet be another 75 basis point hike this year. It did not foresee cutting rates again until 2024.

Read more: Federal Reserve stays hawkish with jumbo-sized rate hike

Shipley-Strickland said we’re now starting to see the impact of the early interest rate increases in Canada since the month-over-month rates for the consumer price index (CPI) have been flattening or declining since July.  But, she noted that’s different than the core CPI or headline inflation, and forecasts are showing that inflation could be down to about 2%, “which is the magical number they seem to want to operate at”.

She is concerned that we’re starting to see slowdowns in the Canadian, U.S., and European economies, so “it’s time to take a pause and see the impact of what has happened before we continue to raise the rates. Will they do that? I don’t know, but that’s what I would like to see because I don’t think we’ve felt the full impact of these interest rate rises on inflation yet. So, why keep raising interest rates when we don’t know the full impact?”

Read more: What the markets expected while awaiting the Federal Reserve announcement

Shipley-Strickland recommended that advisors start to reposition their portfolios according to whether they’re anticipating a slowing economy or a global slowdown and potential recession.

She’s positioning her portfolios a little defensively because she’s seeing all the signs of a real economic slowdown. She said she’d err on the side of caution because her clients running out of patience after having been through COVID and all the market volatility. She’s also getting out of cyclicals, since those stocks that follow the economy.

She noted that her younger clients still believe in the long-term potential of technology, so she’ll keep those positions. She’s also planning to put some clients’ cash to work since there’s been a market drawdown. But, she’ll also continue to invest in the energy industry because “I really see it as a good potential for some of my younger clients”.