Investors have been waiting with bated breath for a recession, hoping that it will force the Federal Reserve to cut interest rates. But recent evidence suggests that this may be an increasingly unlikely prospect. Despite some signs of economic health, a mild economic slowdown could still be on the horizon. And if inflation continues to moderate but remain stubbornly high, both stocks and bonds could face further sell-offs later this year.
What’s Driving Inflation?
Inflation is one of the main factors driving speculation about whether or not the Fed will cut interest rates. And while goods inflation has been dissipating quickly, wage inflation appears to be “sticky”—that is, it remains stubbornly high over time. This means that even with a mild economic slowdown on the horizon, the Fed won’t be in a position to cut interest rates any time soon.
The Impact of Low Interest Rates
Low interest rates can have an impact on all types of investments, from stocks and bonds to real estate and commodities. Low rates tend to drive up stock prices because they make borrowing money cheaper—which in turn makes it easier for companies to grow their businesses and increase their profits. Low rates also make bonds more attractive than cash deposits since investors receive higher yields from them than from cash deposits with banks. Therefore, when there is little chance of rate cuts in sight, investors tend to move away from stocks and bonds as safe havens for their money and look elsewhere for higher returns.
It’s important for investors to understand why there likely won’t be an interest rate cut anytime soon so they can plan their investments accordingly. Over time, the market will realize that the Fed isn’t going to pivot its policy back to rate cuts anytime soon—especially if there is no recession or only a mild economic slowdown this year coupled with persistent inflation issues. So while investors should certainly keep an eye on what’s going on in Washington D.C., they should also take steps now to ensure that their portfolios are positioned correctly for long-term success regardless of what happens in 2023 and beyond.