This week the U.S. Department of Treasury yield curve inverted for the first time since 2006.
This means that shorter-dated five-year treasury notes rose to 2.6361% while the 30-year yield was 2.6004%. Normally investors demand a higher interest rate when they are tying up their money for a longer period of time. The longer the maturity date, the more the issue is subject to inflation. Many times in the past, an inverted yield curve has signaled a coming recession like what happened in 2008.
Interest rates have started to rise after the Federal Reserve's quarter-point increase last week.
Raising interest rates and reducing quantitative easing are two of the main tools the FED uses to slow down inflation. Mortgage rates and other loan costs have already started to increase in reaction to the government's rate change. The FED has made it clear that they will be doing a whole series of rate hikes this year. St. Louis Federal Reserve President, James Bullard, has suggested they raise short-term borrowing rates by a full point by July.
Many people have criticized the FED for waiting too long, including in this column. Michele Schneider, partner and director at Marketgauge.com, said, "I think it should have happened already, quite honestly. I think they should have been less concerned (with market fallout) especially as we saw a surge in the market, as we went through the summer and into the fall of 2021."
The stock market has not reacted yet to the increase.
Everyone is feeling the pain of rising prices. It is especially hard on lower income people and seniors living on a fixed income.
Some elements of inflation will come down rather quickly, while other things will never go down. Gasoline is one thing we are seeing some decrease in cost from. Prices vary widely within a few miles. I saw one station today selling a gallon of regular gas for $4.59 while a station about five miles away is about $4.15. That is quite a difference.
Probably the majority of price increases will be more permanent.
A calzone which was normally $1.99 at a well know discount super market is now selling for $2.49. That is a 25% increase. I had a popular hamburger meal deal at a well-known chain. It used to cost around $6.99, and is now $8.89 with tax. These types of prices are not going down because of substantial labor cost increase. Yet, even with these higher wages, there are still "help wanted" signs all over the community.
The president recently signed a major infrastructure bill. It will spend more than $1 trillion improving bridges, water lines, high speed internet service and making other physical improvements.
While we need many of these things, a bill like this is most often passed when the economy needs stimulated – not during high inflation times like today. With millions of unfilled jobs available in the country today, this bill may make inflation worse.
Your investments may perform much differently in this new economic environment. Forty-year high inflation, rising interest rates, probably higher taxes to pay for all of the debt, and other changes could have a big impact on stocks and bonds.
Make sure your portfolios are aligned with this new economic world.
Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, "Your Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility." If there is an area that you would like to see discussed in the column, send your suggestions to [email protected].