Sedona Arizona

Soaring inflation, the Fed raises

The Federal Reserve raised its benchmark interest rate by 75bps, or 0.75%.

It’s the most aggressive single rate hike going back to 1994 in an attempt to combat soaring inflation.

Fed officials also significantly cut their 2022 GDP growth outlook, now anticipating just a 1.7% gain, down from an expectation of 2.8% forecasted back in March.

In my opinion, the Fed is behind and trying to play catch up here. Inflation is soaring and the wheels on the bus are probably turning must faster than expected in such a short amount of time.

Take mortgage rates for example. In January of 2022 the average rate on a 30 year fixed mortgage loan sat around 3.25%. As of today, we’re sitting almost double that rate and slightly higher than the average over the past 20 years.


Rates climbing this far this fast may very well stagnate the housing market. It’s been all boom for two years… are we headed for a bust cycle?

Let’s look at the labor market

We’re starting to see layoffs, especially in the tech and related industries:

  • Coinbase is laying off 20% of its workforce
  • Robin Hood, about 9%
  • Redfin, 8%
  • Tesla, 10%
  • Stitch Fix, 15%
  • Carvana, about 2,500

We saw the “Great Resignation” in 2020 and 2021. Then we saw Help Wanted signs all over the place. Now even entry level positions are paying significantly more than imagined only two years ago.

Let’s walk this through: Employers are offering higher wages to hire and retain workers during a time when inflation is drastically impacting the costs of goods sold (COGS). Other employers are laying off employees because of increased costs and lowered revenue projections.

As this plays out, more workers are available to take whatever jobs they can get, so wages will likely fall. We’re looking at having more workers available the very time when less jobs will be available. After two years of workers having all the bargaining chips, I believe their party is winding down and fast.

If breakfast sandwiches were economic indicators…

Last week I was headed to work early for what was to be a long day. I realized I had forgotten to eat breakfast, I would not have time to leave for lunch, and I had no snacks tucked away at the office. So, I ran through a fast food drive-thru – I know… not the healthiest of choices – and ordered a breakfast sandwich combo meal.


That’s right – I paid EIGHT DOLLARS AND FORTY-NINE CENTS for a sausage, egg and cheese sandwich, a hash brown thingy, and not great coffee. As if I needed another reminder why fast food isn’t great body fuel…

And then there’s the price of gas…

In May, the cost per gallon of gas here in Phoenix was around $4.59 or so. Fast forward one month, it’s now $5.49 per gallon at most stations. I will not be surprised to see it tick past $6 per gallon by the end of summer.

As of June 14, 2022 the AAA National Average is $5.016 per gallon for Regular grade. All-time high, as shown in the below chart.


One year ago is was almost $2.00 per gallon less at $3.08 on average. I don’t know how our economy will continue chugging along at $6 or even $7 per gallon. Yet, there are indications we may be headed that direction. So far we’ve just about shrugged off $5 per gallon.

We have to remember oil is a commodity. The price per barrel trades largely on expected future supply. One primary way to bring the cost down is to produce more oil.

What about the million barrels per day the Biden administration is releasing from the strategic reserve?

The US consumes a little more than 19 million barrels per day. A million barrels is roughly 5% of the demand. It’s simply not enough to influence prices. The US is the largest producer in the world. Oil execs are concerned about over-producing and not apt to ramp up to a higher level. If they over-supply and crash the price of oil, that’s also bad in many ways for the economy.

Recession watch

The current data does not suggest we are currently in a recession. However, that data lags because we don’t know by the data that we ARE in a recession until after it has begun. These things take time to develop, and they take time to exit.

Given the current conditions, I’m thinking some sort of recession over the next 12-18 months is a good base case. Unless something major breaks, it may likely be mild and short-lived. Regardless of when it comes, now is a good time to get organized and revisit your financial purpose.

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Author: Dale Shafer II, CFP®, APMA®, CDFA®

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