FINANCIAL

Powell Pivot

Jerome Powell is the Chairman of the Federal Reserve (Fed), the central bank for the United States. Created by congress in 1913, the Fed has been charged with the dual mandate of price stability (inflation control) as well as stimulat ing full and sustainable employment. Since the start of the Covid-pandemic, the Fed’s focus has been more on the employment side of the equation. The Fed aggressively cut interest rates in 2020 in order to try and lessen the economic blow caused as a result of the Covid-pandemic recession. However, at the December 2021 Federal Reserve (Fed) meeting, there was a notable shift in messaging that the Fed would focus less on their full employment mandate and more on price stability and inflation control. This shift in focus for the Fed is called by some as the “Powell Pivot”.

In order to try and achieve their dual mandates, the Fed relies on monetary policy, and of- ten more specifically adjusting the Federal Fund rate. The Fed can influence interest rates several ways, but the most common is by adjusting the rate at which banks borrow overnight from each other. This overnight rate is called the Federal Funds Rate. An increase in the Federal Fund rate slows demand for consumption in making the cost of capital (loans) more costly. Less de- mand for consumption should slow down infla tion rates, thus achieving one of the Fed’s mandates in price stability.

What does the “Powell Pivot” mean for investors? As the Fed is likely to increase the Federal Funds rate in the year ahead, investors are likely to see higher interest earned on short-term bank deposits such as savings and money mar- ket accounts as well as certificates of deposit. Those taking out new loans or those that have adjustable rates loans, are likely to see the interest rates charged on those loans increase in the future. For investors in the bond market, it is more difficult to tell the impact of the "Powell Pivot”. If the Fed can “normalize” the increase in prices (inflation) with a slow and deliberate pace, investors are likely to be met with more stable and less likely for a significant decline in bond prices ahead. However, if the Fed aggressively increases interest rates, this may spook the bond market for fear that the Fed has lost control of price stability, putting downward pressure on bond prices. Additionally, there is a possibility that the Fed will hike rates too aggressively to a point where consumption is stalled and causes a recession. During a recession, asset prices commonly fall.

Regardless of the impact of the “Powell Pivot” investors should focus their attention on those financial matters they can control. Pro – active budgeting, clearly articulating financial goals, fully funding an emergency fund, and insuring against losses you cannot or do not want to personally absorb, are all things that are controllable on a personal level.

Adam Smit is CERTIFIED FINANCIAL PLANNER™ with Adam Smit Investment Management LLC and a registered principal of LPL Financial. This article is for general infor- mation only and not intended to provide specific advice or recommendations for any individual. Securities offered through LPL Financial. Member FINRA/SIPC.

BY ADAM SMIT