We continue to share a collection of charts with you that we hope you find relevant in understanding the current investment climate.

Last year marked an impressive economic recovery from the COVID-19 pandemic and the resulting lockdowns. GDP grew at an annualized rate of 5.7% and the Consumer Price Index (CPI) increased at 4.7%. Yet, as recently as September of last year, the short-term interest rate set by our Federal Reserve was near zero, and the yield on the 10-year U.S. Treasury bond was about 1.5%. As I wrote in last September’s Chartbook, conventional wisdom is that a bond’s yield should be somewhat higher than the inflation rate to give investors a positive return (and control inflation). It clearly wasn’t.

Beginning at year end, things changed. The Federal Reserve signaled they were going to start raising their short-term interest rate to fight rapidly rising inflation. Nonetheless, the Consumer Price Index (CPI) is now increasing at an 8.3% pace. The interest rate on the 10-year U.S. Treasury bond has almost doubled to near 3.0% (and resulted in much lower bond prices). Additionally, and unfortunately, second quarter GDP is predicted to be growing at a sluggish 0.9% pace. Have the current increases in interest rates been enough to fight inflation despite still being below the inflation rate?

Clearly, the economy does not need higher interest rates, but inflation cannot be allowed to take hold. As I wrote in April’s Chartbook, some factors currently pushing inflation may be transitory, but if inflation is persistent, it must be dealt with through further increases in interest rates. However, despite current interest rates still being below the inflation rate, further interest rate increases can be especially harmful when a meager GNP growth rate does not match (i.e., Stagflation).

It may be that interest rates have risen enough to choke off inflation without further increases. It would be the best outcome.

As always, know what you own, do not overinvest, and stick with quality.

Download the May Chartbook

-Cliff Jarvis