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Inflation Maintains Grip on Markets and Economy

Federal Reserve continues interest rate hikes; individuals should stay focused on long-term savings strategy.

By Joseph Gaffoglio, CFA

The past few months have seen increasing turbulence in the financial markets as the United States economy attempts to navigate persistently high inflation, geopolitical instability from the war in Ukraine and a long-term recovery from the COVID-19 pandemic. For both investors and savers, while the uncertainty and market fluctuations can be jarring, it is important not to let these—and other temporary events—influence your long-term financial planning.

Interest Rate Hikes

Since the U.S. Federal Reserve shared plans earlier this year to implement a series of benchmark interest rate hikes during 2022, it has, in fact, done so at each of the last three Federal Open Committee Meetings. The most recent, announced on June 15, was an increase of 75 basis points—the largest rate hike since 1994. The rate and frequency of additional hikes remain to be seen, but the Fed has indicated that it is focused on bringing down the highest inflation the United States has seen in four decades, which signals that there likely is more to come. While additional interest rate hikes are now also being evaluated against the rising concern of a recession, these increases are currently viewed by the Fed as necessary to combat inflation and restore price stability—something Americans are desperately seeking—as prices continue to rise to record levels for everything from food to gas.

The European Central Bank also recently announced plans to raise its benchmark interest rates for the first time in 11 years. As inflation and geopolitical uncertainty affect international economies, it’s likely that more central banks will continue to raise interest rates to seek price stability worldwide, just as the Fed is doing here.

What Do These Rate Hikes Mean?

As the Fed continues to raise interest rates, the cost of borrowing money for consumers is becoming greater. Higher rates increase the amount of interest consumers pay on credit cards, car loans and home mortgages. As certain consumer goods and services become more costly, the rationale is that demand for them will decrease and eventually cause overall price increases to return to more typical levels and, hopefully, do so without tipping the country into an economic recession.

What’s Happening in the Housing Market?

According to the CoreLogic Home Price Index, home prices rose 20.9% year-over-year and 3.3% from February to March, which is the fastest pace on record. This surge has potentially overvalued homes, pricing many buyers out of the market. Given the significant increase in mortgage rates that we have seen over the last few months, it is expected that the housing market may cool over the balance of the year.

Strong Job Market a Positive

Despite the recent market turbulence, the labor market has remained strong, with the Fed projecting unemployment to remain below 4% for the rest of the year. Low unemployment and a strong job market, combined with higher levels of savings remaining from many of the pandemic relief fiscal programs, should help support a rebound in consumer spending, which makes up the largest portion of the domestic economy.

Federal Reserve in a Tough Spot

As inflation rises and continues to negatively impact the spending power of consumers, market commentators have debated whether the Fed is taking the appropriate steps to combat rising prices. While it is widely acknowledged that the Fed started raising interest rates too late, it has also recently begun what’s called quantitative tightening—which is the process of shrinking the Fed’s own balance sheet by not reinvesting proceeds from maturing Treasury securities and mortgage-backed securities. Quantitative tightening and raising interest rates at the same time is a critical move for the Fed to enforce its mandate of price stability.

Staying On Course with Your Investments

Despite the overwhelming and unceasing headlines around financial market volatility, inflation and higher interest rates, it’s important to remember that when it comes to saving for retirement, the best thing you can do to ensure a strong financial future is to stick to a long-term financial plan that aligns with your risk tolerance and time horizon, maintain a diversified portfolio, and don’t let market gyrations lead you astray.


Joseph Gaffoglio is the President of Mutual of America Capital Management LLC.

The views expressed in this article are subject to change at any time based on market and other conditions and should not be construed as a recommendation. This article contains forward-looking statements, which speak only as of the date they were made and involve risks and uncertainties that could cause actual results to differ materially from those expressed herein. Readers are cautioned not to rely on our forward-looking statements. This content is for informational purposes only and not intended to be investment advice.

Mutual of America Capital Management LLC is an indirect, wholly owned subsidiary of Mutual of America Life Insurance Company.

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