On Wednesday, the U.S. Federal Reserve (the Fed) unsurprisingly raised interest rates by 25 basis points. The vote was unanimous: 12\u20130.<\/p>\n
The stated reason was inflation. But sometimes,\u00a0the thing is not the thing<\/strong>.<\/p>\n Inflation remains a problem, but inflation is increasingly being driven by forces that a quarter-point rate increase cannot fix. Higher oil prices are flowing through the cost of almost everything, while the artificial intelligence (AI) freight train is creating extraordinary demand for energy, infrastructure, capital, and specialized labour. Making mortgages, business loans and government debt more expensive will not produce another barrel of oil, build a power plant, or expand the electrical grid.<\/p>\n The deeper problem is America\u2019s increasingly uncomfortable fiscal arithmetic: approximately US$40 trillion of federal debt<\/strong> and annual interest costs approaching US$1.3 trillion<\/strong>. This is not an excess demand problem; this is a printing too much money problem. Raising rates may suppress some demand, but it also raises the cost of financing that debt making the underlying problem worse.<\/p>\n Here is what I think this decision was about.<\/p>\n The Fed was backed into a corner. With inflation elevated and its credibility being tested, it needed to project unity, independence, and resolve. A unanimous increase delivered that message. This was arguably less about tapping the brakes on the economy and more about restoring confidence in the driver.<\/p>\n Meanwhile, bond investors continue to pay the price. When interest rates were near zero in 2022, we concluded that bonds offered almost no realistic upside while retaining considerable inflation and interest-rate risk. Owning bonds was an all-risk, no-return proposition<\/strong>. We moved to a zero-bond allocation.\u00a0This week\u2019s Fed decision and the bond market\u2019s continued struggles since 2022 reinforce that decision.<\/p>\n A 25-basis-point increase may demonstrate that the Fed is doing something. But investors should always ask the more important question:<\/p>\n “Is it addressing the real problem, or merely the most visible one?”<\/em><\/strong><\/p>\n That is why we focus on productive assets, growing income and businesses capable of adjusting to inflation, not on predicting the Fed\u2019s next move.<\/p>\n We don\u2019t predict. We prepare.<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":" On Wednesday, the U.S. Federal Reserve (the Fed) unsurprisingly raised interest rates by 25 basis points. The vote was unanimous: 12\u20130. The stated reason was inflation. But sometimes,\u00a0the thing is not the thing. Inflation remains a problem, but inflation is increasingly being driven by forces that a quarter-point rate increase cannot fix. Higher oil prices […]<\/p>\n","protected":false},"author":149,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_oasis_is_in_workflow":0,"_oasis_original":0,"_oasis_task_priority":"","_exactmetrics_skip_tracking":false,"footnotes":""},"categories":[15],"tags":[],"class_list":["post-721","post","type-post","status-publish","format-standard","hentry","category-perspectives"],"_links":{"self":[{"href":"https:\/\/advisor.wellington-altus.ca\/luckfinancialgroup\/wp-json\/wp\/v2\/posts\/721","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/advisor.wellington-altus.ca\/luckfinancialgroup\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/advisor.wellington-altus.ca\/luckfinancialgroup\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/advisor.wellington-altus.ca\/luckfinancialgroup\/wp-json\/wp\/v2\/users\/149"}],"replies":[{"embeddable":true,"href":"https:\/\/advisor.wellington-altus.ca\/luckfinancialgroup\/wp-json\/wp\/v2\/comments?post=721"}],"version-history":[{"count":1,"href":"https:\/\/advisor.wellington-altus.ca\/luckfinancialgroup\/wp-json\/wp\/v2\/posts\/721\/revisions"}],"predecessor-version":[{"id":722,"href":"https:\/\/advisor.wellington-altus.ca\/luckfinancialgroup\/wp-json\/wp\/v2\/posts\/721\/revisions\/722"}],"wp:attachment":[{"href":"https:\/\/advisor.wellington-altus.ca\/luckfinancialgroup\/wp-json\/wp\/v2\/media?parent=721"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/advisor.wellington-altus.ca\/luckfinancialgroup\/wp-json\/wp\/v2\/categories?post=721"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/advisor.wellington-altus.ca\/luckfinancialgroup\/wp-json\/wp\/v2\/tags?post=721"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}