Pick a side financial advisors: Maximum employment or low inflation.
Which part of the Federal Reserve’s dual mandate concerns you more?
The Fed's favorite inflation rate, the core personal consumption expenditures (PCE) price index, rose more than expected in February, the Commerce Department said Friday. The core PCE price index, which strips out volatile food and energy prices, rose 0.4 percent, above Wall Street’s 0.3 percent forecast. The 12-month core inflation rate ticked up to 2.8 percent from the previously reported level of 2.6 percent in January, above the consensus estimate of 2.7 percent.
The report does not take into account the impact of President Trump’s tariffs which are expected to officially hit on April 2, or his so-called “Liberation Day.”
Meanwhile, on the other side of Fed Chairman Jerome Powell’s ledger, the U.S. economy rose 2.4 percent the final three months of 2024, decelerating from a 3.1 percent pace in the 3rd quarter, the government said Thursday. Gross domestic product (GDP) for the full year 2024 grew 2.8 percent, down slightly from 2.9 percent in 2023.
Higher inflation and slowing growth are the two essential elements of stagflation, the economic scourge that Chairman Powell is desperately seeking to avoid. That means these most recent economic readings are placing him in a box when it comes to the Fed’s next rate maneuver, which prior to today’s inflation report was expected to be a cut of 50 basis points.
The bigger focus for Stephen Kolano, chief investment officer at Integrated Partners, is on the labor market as it relates to the underlying state of the US economy. Kolano said the past several years have seen inflation rise well above both target and historical levels, but the markets still moved higher due to the resilience of the US economy and in particular the US consumer.
“With recent data points pointing to a deceleration in economic growth, any softening in the labor market has the potential to further erode consumer confidence and impact consumer spending which would start to erode the foundation of market strength the last few years,” Kolano said.
Kolano said he is currently seeking broader exposure to equity markets given the concentration that has evolved into the S&P 500. Additionally, with approximately 50 percent of revenues of the Mag 7 coming from overseas, he sees the potential impact of tariffs remaining uncertain against a backdrop of still aggressive earnings expectations.
As a way to offset that risk in the equity portions of portfolios, Kolano said he is allocating to broader equity exposure in areas where he has already seen negative earnings revisions and stocks that are holding up under the weight of those negative revisions.
“To do this we have been bringing allocations to equally weighted indices like the S&P 500 where the concentration is not present and naturally has more exposure to areas like industrials, energy, materials, and health care,” Kolano said.
Similarly, Brent Coggins, chief investment officer at Triad Wealth Partners, is more concerned about the market impact of deteriorating employment rather than another inflationary spike.
“When you look at 2022, we had the latter and it didn’t trigger a recession, largely because the labor market remained strong. Although indicators like initial jobless claims have ticked up recently, they are not at levels yet to indicate a recession is right around the corner,” Coggins said.
When it comes to allocating assets based on this outlook, Coggins remains “very benchmark-aware right now” and is avoiding active bets.
“While some economic indicators might be trending towards yellow, there’s still not enough that would cause us to consider lowering risk, nor are there a lot of obvious relative value market opportunities at the moment. For now, our plan is to just keep calm and carry on,” Coggins said.
Elsewhere, Seth Hickle, managing partner at Mindset Wealth Management, says keeping inflation low is his “top priority” right now. In his view, consumers have been struggling with rising prices since 2021 and are growing increasingly frustrated. With the potential impact of tariffs adding to the pressure, Hickle believes the Fed should remain focused on decisively bringing inflation under control.
“If the Fed does not prioritize low inflation, it could run the risk of losing control over both inflation and employment like we saw during the stagflation of the 1970s. We’re not ringing the stagflation alarm yet, but it is prudent to be aware of,” Hickle said.
Based on this outlook, Hickle favors high quality, value-oriented, and defensive equity names. To mitigate risk, he has been selectively reducing exposure to businesses more vulnerable to these inflationary pressures.
“We’re also analyzing the potential effects of tariffs on profit margins, as some companies may absorb the higher costs in the short term, while others may pass them on to consumers,” Hickle said.
Finally, Michael Rosen, chief investment officer at Angeles Investments, believes that despite its formal dual mandate, the Fed has very little direct influence on economic activity broadly, and employment specifically. Furthermore, he said there is a misperception that there is a trade-off between inflation and employment.
“The Fed does control the rate of inflation via money supply, and the Fed should concentrate its efforts on keeping inflation in check. Economic activity impacts the demand for money, so the Fed must be aware of changing demands, but its focus must always be on containing inflation. As we learned in the 1970s, a recession cannot be avoided if inflation surges,” Rosen said.
According to Rosen, the coming years or decades will see both rising inflation and weak growth as the country attempts to address the massive load of government debt that continues to accumulate. In his view, this makes the Fed dual mandate much more difficult to achieve.
As a result, Rosen advises investors to avoid long-term government debt as inflation erodes that value. And he suggests investors look overseas as the weaker dollar will favor non-dollar assets.
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