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Welcome to the Consequences

High Inflation, banks failing and struggling, and low unemployment, reminds us that there is no such thing as a free lunch. There are always consequences to actions. Currently, our economic system is feeling the fallout from tremendous stimulus and long periods of historically low interest rates, which were triggered by the global pandemic.

Historical stimulus was injected into households, businesses, and state governments – approximately $9 trillion just in the United States and over $42 trillion globally. While it was very appropriate to stimulate economies to stop any financial contagion during the pandemic, the consequences of this stimulus are now front and center.

The Federal Reserve has been battling naggingly high inflation caused by aggressive spending and supply chain issues as the pandemic waned in 2021 and 2022 – like firefighters with hoses, spraying rising interest rates on our economy to slow things down. 

It has been exactly one year since the Federal Reserve’s first rate increase on March 17, 2022, and with seven additional rate increases to follow, there is not yet enough evidence that our economy is slowing. And, as interest rates rise at a record pace, banks who are very sensitive to rate changes began to show levels of stress.

As we all saw in this week’s headlines, Silicon Valley Bank (SVB) – a 40-year-old bank and formerly the 16th-largest bank in the country – failed and had its deposits seized by regulators. Rising interest rates were part of SVB’s downfall, along with a high-speed run on withdrawals from the bank, mostly from small technology firms and their investors. 

SVB is somewhat unique in that it serves the technology industry and many investment companies funding the technology industry. It is also unique in that about 90 percent of its client deposits were above the FDIC insurance limits, and most banks have much lower percentages of client deposits above the FDIC insured amounts.

The banking story initially looked as if it might spread, until the Federal Reserve and other banks stepped in with a record setting $150+ billion in balance sheet additions. Simply put, our financial system is prepared and able to turn a seeming crisis into a non-event 

Unfortunately, we continue to be reminded of our old “friend” from the 80s and 90s – inflation. While inflation itself is not an evil economic condition, it is something that needs to stay in check to keep our economy healthy. Current inflation has been running between 6 and 8 percent and is too high to build a strong economy on.

The Federal Reserve’s goal is to bring inflation down into the 2-3 percent range. As the Fed stays on task, rising rates will continue to dampen a heated economy, but the consequences are real. Charter Oak’s advisors will be closely watching news of the Federal Reserve’s meetings next week (March 21-22) and whether the Federal Reserve plans to pause or continue forward with planned rate increases. 

Despite this unsettling past week, 2023 is looking much better for investors and our economy than 2022. Stocks are showing signs of recovery and some bonds are now paying more than 5.0% percent annually – numbers we haven’t seen in over a decade. U.S. inflation data showed additional easing in February, its sixth straight month following a June 2022 peak. Unemployment is also rising, which is a good sign for markets (although unfortunate for those out of work).

Charter Oak remains cautiously optimistic for stocks and bonds during the first half of this year. While there is no crystal ball, we know that human ingenuity will certainly continue to develop our world and grow our economies. As this happens, we will be there to navigate the complexities of those changes – with professional investment management and sound financial planning guidance and advice, with a long-term, goal-focused perspective. We are ever grateful for the opportunity to serve our clients and look forward to seeing you soon.