Third quarter GDP flashed green for the first time since last year as it grew 2.6%, following two consecutive quarters of negative growth. Trade contributed a large amount as the U.S. exported more oil and natural gas given the turmoil in Europe. But key sectors, including goods, private inventories and residential investment, continued to decline. Now that the average 30-year fixed mortgage hovers above 7%, new home sales are in free fall and that is dragging down growth. Clearly, tightening Fed policy is taking effect, which is no surprise as severe hikes always take root after a few quarters. The question is whether the Fed and other central banks will be satisfied with these declines and tamper the aggressive rate hikes.
The Fed is a fascinating body and part of their arsenal is rhetoric and jawboning. (For those interested in learning more about the Fed listen to my podcast with Ellen Meade ….) Over the last few weeks, we’ve noticed a language change by Fed officials indicating that this hiking cycle may be coming to end. The bond market is flashing signs of such as well given two-year treasury rates are DOWN 20 basis points of recent. However, I anticipate that current rates will be the “new normal” and remain in this range for some time unless a severe recession hits. That makes our job as much easier as higher rates generate more consistent income for our clients. For those sitting on large cash balances in their savings or business accounts, recognize that you can get an attractive yield on that cash now. Reach out to our team if you like to learn more. Much has changed in the last 12 months and now is the time adjust accordingly.