On Wednesday, the Federal Reserve raised its Benchmark interest rate by 75 basis-points. It's the most aggressive rate hike in decades. Just before the Fed made their announcement, WYSO’s Jerry Kenney spoke with Jonathan Hlavac of Everhart Advisors to find out how the move might affect investors.
Jonathan Hlavac: What it means is that there for one day account in their investment portfolio, which I've already had some challenges this year, could face some additional headwinds. But I think it's important to note that those are temporary headwinds. And if you are a person who was approaching retirement, the conversation is a little bit different. If you were very close to retirement or in retirement, you probably already have your portfolio in a relatively defensive conservative position. So, these interest rate hikes are not necessarily going to be as meaningful to somebody at retirement or approaching retirement.
Jerry Kenney: And so, what do you urge as far as actions for them?
Hlavac: For individuals who are farther away from retirement, they should, first of all, consult with a professional, meet with the advisor for their retirement plan, speak to somebody who is knowledgeable rather than reacting based on Twitter notifications or stuff that they read on the Internet, fear mongering and alarmism.
Kenney: There are some analysts who believe that this could be as bad as the 2008 housing bust and the Great Recession. How and when will we know how it compares?
Hlavac: Right now, it's not that close to be honest with you. The decline in '07 through '09 was 53% from peak to trough. We're at about 20 right now. There's no guarantee that it doesn't go lower than that, but it's not even in the same conversation yet.
You know, what basically happened was over the last two years, the federal government pumped money into the economy through a number of methods – the Paycheck Protection Program provided dollars to businesses; stimulus payments, and extended unemployment benefits provided payments to individuals and families; a moratorium on evictions and foreclosures; a moratorium on student debt repayments. All of those things have pushed a lot of dollars into the economy.
That and then the production, the goods and services that were produced, declined or remained at least level because people were at home and not necessarily going to work. Well, what happens when you have a lot more dollars in the system for the same or fewer goods and services? The price of those goods and services naturally increases. And that's what the Fed has to address right now, trying to bring equilibrium to the amount of dollars that have been put into the system, in the amount of goods and services that are out there, which is basically trying to get inflation under control.
Now, the Fed's inaction up until this point, they haven't started doing anything until March of 2022. In retrospect, I'm not faulting the Fed here, but in retrospect, maybe action should have been taken in 2021. Now that that has not happened, they're kind of playing a little bit of catch up, which is why today's rate increase is probably going to be aggressive trying to get in front of that inflationary issue. But what it means for prices is that 2022 this year is probably going to be an entire year of high inflation, and 2023 is shaping up to be a year with increased prices of goods and services as well. And the Fed is trying to get this under control for the future for 2022, 2023, beginning of 2024. I know that's not necessarily that optimistic, but we should be realistic about this, that inflation and some of the turmoil that we're experiencing in the capital markets, it's not something that's going to be resolved by the 4th of July.
Kenney: Is there anything else that the Feds can do that you'd like to see?
Hlavac: Yeah, the Federal Reserve doesn't just control interest rates. They also control monetary policy. They have a balance sheet of federal treasury securities that they have been buying in the open market for a very long time since the 2008 market crash. They need to start selling those securities that they only have a very inflated balance sheet. And if they sell securities in the open market and those securities are purchased by pension funds and endowments and mutual funds and large institutional buyers, that will contract the money supply, take dollars out of the money supply and bring them back to the central bank, which is what the Federal Reserve is. And it will effectively also address inflation.
It should really be, in my opinion, a combination of interest rate hikes and the sale of federal treasury securities by the Federal Reserve. A combination of those two things would address inflation more quickly than only rate hikes.
Kenney: Jonathan Hlavac with Everhart Advisors. Anything else?
Hlavac: Yep. Maintain a long-term perspective. If you're a person who is 40 years old and you have to work for another 25 or 27 years. Try not to get too despondent about what's happening in the summer of 2022. If you are a person who's closer to retirement and you're concerned at this time, contact your profession, contact your financial advisor, and connect with someone before acting on something you read on the Internet or information that you got from your neighbor who's not necessarily a financial professional.
Kenney: Jonathan, thanks.
Hlavac: Thank you, Jerry.
