Presented by Nicholas Wealth Management
Federal Reserve Raises Rates by 0.25%
The Federal Reserve announced Wednesday that it was raising its key federal funds rate by 0.25% to more than 5%. This is the 10th consecutive rate hike and a 500-basis point increase in the federal funds rate over the past year. Fed Chair Powell believes we are just now starting to see the effects of monetary policy and the economy should see further headwinds from tightening credit conditions. He made a clear distinction that the fight against inflation is not done and that inflation will not come down immediately. The market seems to be wrong regarding the timing of rate cuts and by the Fed Chair’s own admission it would “not be appropriate” to cut rates in 2023. What was missing from the recent meeting was any guidance relating to additional rate hikes. It seems the Fed is much closer to the end and this could very well be the last rate hike for 2023. The market will want to see meaningful declines in inflation and employment growth going forward or it may be forced to face the realization that rates may remain stubbornly higher for longer. This is a losing scenario for both markets and the banking sector. We believe default rates will increase and investors should put a premium on credit quality.
U.S. Economic Growth Slows in Q1:
The Bureau of Economic Analysis reported last week that real (inflation-adjusted) U.S. gross domestic product (GDP), a measure of all goods and services produced, rose at a seasonally-adjusted annual rate of 1.1% in the calendar quarter ended March 31, 2023. While this was the third consecutive quarter of growth, the pace slowed from the prior reading in Q4 2022 of 2.6%. Positive contributions in Q1 came from consumer spending and an increase in government spending. Conversely, overall growth was slowed by materially lower spending by businesses on inventories.
Home Prices Flat in February:
Home prices across major U.S. metropolitan areas posted a modest gain of 0.1% in February compared to the prior month, according to the S&P CoreLogic Case-Shiller 20-City Composite Home Price Index. This marked the first monthly increase since June 2022. On an annual basis, however, prices continued their sharp downward trend. The 20-City index rose only 0.4% versus the prior year, down from a 2.6% pace in the previous month; as recently as April 2022, prices had risen at a 21% clip. Lower annual prices were seen in eight of the 20 markets, led by San Francisco (-10.0%) and Seattle (-9.3%). On the other hand, annual price growth remained solid in many Southern cities, including Miami (+10.8%), Atlanta (+6.6%), and Charlotte (+6.0%).
Consumer Indexes Mixed in April:
Trends in widely-followed U.S. consumer outlook surveys were mixed in April. The Consumer Confidence Index reported by the Conference Board, a private research group, fell from 104.0 in March to 101.3 in April, as consumers expressed less optimism about business conditions and labor markets. The index remains well off its post-pandemic high of 128.9 in June 2021. Meanwhile, the Index of Consumer Sentiment produced by the University of Michigan rose modestly from 62.0 in March to 63.5 in April. While this index has improved from a recent low of 50.0 in June 2022, it too remains far below its 2021 high of 88.3, posted in April of that year.
Source: Gallagher Insurance, Risk Management and Consulting
