Last week’s CPI reading of 8.3% was higher than expected, suggesting bringing inflation down is not a layup. Certainly not “new news.”
Inflation can be a lagging indicator reporting what has previously transpired.
After over-stimulating the economy for a year, the Fed began it’s mission to reverse their mistake by hiking rates this past March by a whopping .25%. That was then followed-up with a .50 rate hike in May, and .75 rate hikes in both June and July.
Fed and Company will meet this Tuesday and make their rate increase announcement on Wednesday afternoon. The consensus is for another .75% rate hike, however I would not rule out something higher. What Powell actually says at this press conference may impact the short-term more than the percentage increase.
Is the global economy slowing? The short answer is yes, with many other countries slowing considerably, and we are following their coat tails.
Last week, Fed Ex issued a profit warning suggesting the global economy has already slowed. Other US companies have also started to reduce guidance. It’s no secret that the housing market has slowed and we’ll hear more reports of the state of the housing market this week.
The next few months are concerning, as Powell has made it clear he wants home and portfolio values to drop, and the unemployment rate to rise. This is his solution to bring inflation under control. Purposely creating demand destruction, well, to me, is not American.
I would much prefer to write about the positives in the economy, however for now, we are where we are! I am looking forward to when this downturn is over.
I do believe, like all downturns, this will end. Keep in mind, the largest generation in the US are the millennials, ages 26 to 41. As they enter their peak earning years, the economy should gain steam in a similar manner to the early 80’s, when the early baby boomers hit their peak earning years.
Markets
Last week, US market indexes dropped between 4% and 5%, reflective of the Fed.
Oil, which started the year at $75, zoomed up to $130 and now is below $85/barrel. This is a major piece of data that suggests the economy is definitely slowing down.
Interest rates are in the process of over-shooting with the 2-Year US Treasury ending last Friday with a yield of 3.86% and the 10-year @ 3.45%.
Medicare Part D Update
The Part D Prescription Drug program will have “price stabilization” beginning in 2024. The maximum annual increase in premium cost will be 6%. Boy, 6% doesn’t seem so enticing…. I wonder what drug companies will do in a couple months to their rates in 2023, knowing that in 2024, rate increases will be capped….? We’ll find out shortly.
Beginning in 2025, Medicare beneficiaries will have a $2K annual out of pocket cap for prescription drugs. You will also have a monthly “smooth-out” option. For example, if you will exceed the 2K, you can either pay as it comes up, or divide the 2K over a 12-month period. This will certainly benefit those on a fixed income.
Clarification for Medicare Drug price negotiation: Beginning in 2026, Medicare will negotiate 10 drugs, followed by 15 more in 2027, and 15 more in 2028. In 2029, 20 additional drugs will be added. My information suggests the drugs chosen in each of those years are the most expensive drugs.
Money on the Sidelines
For those who maintain an emergency fund or just have additional funds not earmarked for stocks and bonds, US Treasuries are offering an attractive opportunity. We can purchase short-term treasuries that have very competitive yields! Your funds will fluctuate as interest rates bump around, however if you hold them until maturity, you will receive full value. For example, this morning a 3-Month Treasury is yielding over 3%, a 6-month, over 3.8%. A 1-year Treasury is approximately 4%.
Please feel free to reach out to discuss if this makes sense for your situation! You can schedule online or give our office a call — 856.354.3200 ext. 205.
