Author: Joseph N. Stevens
Not long ago, consumers enjoyed the luxury of financing purchases at historically low interest rates. There were occasions to finance the purchase of a new vehicle with a 0% APR loan, and for a time homeowners were able to secure a 30-year fixed rate mortgage at a rate under 3%.
Then inflation began to spike: Constrained supply chains combined with rejuvenated consumer demand and accommodative monetary/fiscal policy pushed the Consumer Price Index (CPI) from an annual rate of under 2% in the early months of 2021 to a high of 9.0% in mid-2022. The US central bank, the Federal Reserve (Fed), initially thought inflation would be transitory, so it kept its key policy benchmark rate — the federal funds rate — near zero. Inflation continued to rise though, prompting the Fed to enact a more restrictive interest rate policy. Those 0% APR auto loans — gone; meanwhile, mortgage rates spiked northward of 6%.
Fast forward to the present day, and the CPI has fallen from its mid-2022 highs to 3.0% in June 2024. This drop represents significant progress on an absolute level, but it's still higher than the Fed's target of 2.0%. This leads to the question that this paper seeks to address: When will the Fed shift to a more accommodative interest rate policy and how might that impact investment portfolios?
