Honey, I Shrunk the Economy

Let’s hope that the Fed’s efforts to moderate inflation turn out to have the same happy ending as Disney’s movie, “Honey, I Shrunk the Kids.”

As we all know, the Fed is currently in the process of bringing its financial arsenal into play in an effort to lower inflation levels and move back toward historical norms, consistent with long-term targets.  While there are many factors contributing to current, unacceptably high inflation rates, most are beyond the Fed’s capabilities.  What the Fed can do, and is doing, is trying to gradually shrink the economy, by moderating the money supply and adopting strategies that are designed to curtail demand.

This is not going to be easy.  It is very likely that the Fed will probably use an incremental approach with an evolving use of the various tools at its disposal.  This could lead to some choppiness in the market.  Despite an appropriate caution, a soft landing is far from certain.

Investors should recognize that there are risks inherent in the Fed’s attempt at demand destruction.  Moreover, a slowing economy will have varying effects, in scope and degree, on different parts of the economy. Sorting this out will require a careful evaluation of the underlying economic drivers for each segment of a portfolio and may warrant consulting with your advisor(s).

All comments and suggestions are welcome. Walter J. Kirchberger, CFA