Whether you are a borrower or an investor (most of us are both), everyone has a vested interest in the future direction of interest rates. Considering benchmark short-term rates have been anchored at zero since the onset of the pandemic, it’s a safe bet that the next move will be up.

The only question is when.

The Fed Funds futures market is currently pricing in a 90% probability of rate tightening over the next 18 months. But why not go straight to the horse’s mouth? The latest “dot-plot” projections show 11 of the 12 members of the FOMC anticipate a pair of quarter-point rate bumps in 2023.

_{Source: Federal Reserve Board}

And these are the people calling the shots.

For what it’s worth, the group saw no rate hikes on the horizon back in March. Suddenly in July, they are now expecting two. Clearly, something has changed. St. Louis Fed President Jim Bullard believes we’ll actually see the first rate hike next year in 2022. Seven FOMC policymakers agree.

But what happens after that?

The Central Bank has remained consistently dovish and will likely take a measured wait-and-see approach. Fed Chief Jerome Powell and his cohorts have painstakingly jump-started the pandemic-stricken U.S. economy and will be highly reluctant to take aggressive steps that could potentially derail its momentum.

So they will be deliberately slow on the trigger.

There have been gin-clear indicators of latent inflationary pressure. We’ve all seen them. Yet, far from tapping the brakes, the Fed has left its foot firmly planted on the quantitative easing gas pedal. In the twin mandate to maximize employment and corral inflation, the former is clearly the top priority right now.

But again, things are starting to change.

The Fed’s preferred inflation barometer is the Personal Consumption Expenditures (PCE) index. This particular gauge spiked 3.4% last month, the sharpest annual increase in about 30 years — and well above the Fed’s 2.0% comfort zone. Meanwhile, the same trend was echoed by a 5.4% surge in the benchmark consumer price index (CPI). Some of that increase can be blamed on volatile food and energy prices. But strip them out, and core CPI still revealed a 4.5% uptick in June – the highest since 1991.

This isn’t an anomaly. We’ve been seeing it for months. May’s core CPI reading showed the most severe inflation since May 1992. For perspective, I was graduating high school and preparing for college that month. That’s the last time inflation ran this hot.

If you’ve tried to book a summer vacation, then you have seen this in full effect. Average airfare has climbed 24% over the past year. Car rental rates have skyrocketed 110%. And you can forget about finding a beachfront or lakeside property rental. There is scant available inventory on sites like Expedia or VRBO as record-breaking crowds pour into popular destinations.

A standard Best Western hotel room in Destin, Florida for next Saturday night runs $370. I travel frequently and have never seen anything quite like it.

Fuel. Groceries. Hotel stays. Pre-owned vehicles. It’s everywhere you look.

Here’s My Take

The Fed certainly isn’t blind to these numbers. But it has largely dismissed them as transitory, the temporary result of Covid supply chain disruptions and one-off stimulus check spending. To be fair, some of the data points support that argument. The unprecedented events of 2020 have certainly skewed year-over-year comparisons in 2021.

And runaway prices will likely moderate as supplies catch up with demand. We’ve already seen that with lumber.

But I’m not sold on the notion that this wave will crest and everything will quiet down in a few months. Let’s strip out Covid distortions and look back at current prices versus pre-pandemic levels from two years ago. On that basis, CPI has still climbed by a fairly robust 2.5%.

Furthermore, labor costs are creeping upward because there aren’t enough applicants to fill the current record-high 9.3 million job openings. And as we’ve discussed, the shortage of raw materials has led to price hikes for everything from beer to breakfast cereal. According to the Wall Street Journal, 48% of the nation’s small businesses lifted their prices last month – the most since 1981.

Let me ask you this: how often do you see retail prices drop?

Businesses are usually quick to adjust upward when costs rise, but slow to lower when they fall (they will gladly pocket the extra margin). Translation: these higher prices are here to stay.

Even Chairman Powell concedes that inflation may be picking up steam. Here’s what he had to say a few days ago. “We’re experiencing a big uptick in inflation, bigger than many expected, bigger certainly than I expected.”

If these pressures don’t subside, his hand may be forced. How long until we stop using the word “temporary”. Three months? Six months?

Action To Take

The point is that when we talk about Fed policy or inflation, it’s easy to forget that this stuff impacts people’s lives in a very real, meaningful way. And I’m not just talking about consumers. You can make the case that this impacts retirees even more…

Think about it… If you rely on a fixed income, it can be daunting to think about earning enough to get ahead, much less keep up with inflation. But I’m here to tell you that it is possible.

I hear a lot of people say that the (good) high yields are all gone. Nothing could be further from the truth…

Sure, they’re tougher to find, but the are out there. You just have to know where to look — and that’s where my team and I come in…

Just last month, we added a real estate lender to our portfolio over at High-Yield Investing that’s generating enough interest to support a lofty 8% yield. And that’s not the only high-yielder we’ve found lately. Far from it, in fact…

I just released a new report about five “bulletproof” income payers who have proven to be so strong, so reliable, and so generous… that they can be counted on, no matter what happens with the economy.

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