Above the Fold

The Fed, Interest Rates, Inflation, Transitory … What’s It All Mean?

Several times a year the Federal Reserve (Fed) convenes to discuss the current economic climate and decide what it needs to do to keep unemployment low, prices stable and the overall economy healthy. After its two-day meeting ended yesterday, the Fed did maintain interest rates near zero, but hinted that rates would likely rise sooner than expected; now by the end of 2023 (still very low by historical standards). They did note relatively high inflation (currently) and a stronger than anticipated economic rebound as rationale for a quicker rate hike, despite an unemployment rate that’s still above the Fed’s target.

Market experts listen to each and every word of the testimony that often follows these meetings for clues to future action and how it might impact different areas of the market. But for the average investor, there’s a plethora of jargon and theories that can be outright overwhelming. Phrases like transitory versus structural inflation, dot-plots and more can muddy the water for someone who just wants to know how their stocks and bonds are likely to perform over the next six months to a year.

What we can tell you is that Westwood believes much of the dramatic inflation felt throughout sectors like lumber, metals, semiconductors and finished goods are likely to moderate over time (transitory). That said, it’s also important for us to remember that a little inflation is a good thing, and it’s even a goal for policymakers and the Fed. Structural inflation, on the other hand, can be more permanent and occurs when forces like supply and demand permanently change or when industries (think tech or e-commerce) dramatically alter the costs associated with certain processes. We will continue to closely monitor data for any dramatic policy or inflationary pressure changes. 

Three Things 

1. Lumber Goes Into Liquidation Mode – After peaking at an astounding $1,711.20 per thousand board feet in May, lumber prices have tumbled more than 41% to just over $1,000. The sharp drop suggests a bursting bubble, but economists and analysts are carefully weighing the probability of a continued selloff. That said, the Wall Street Journal has reported a flood of “shadow inventory” is hitting the marketplace, which could add downward price pressure. Shadow inventory is essentially lumber that was hoarded excessively as prices rose, and is now adding to inventories as stockpilers turn to sellers.
2. Copper Descends From Its Peak – Another industrial element has lost its luster as of late. A former leader of the commodity rally this year, the malleable metal has fallen 9% recently, down to a two-month low as China is threatening to release its stockpiles onto the open market. Just as we’ve seen in lumber, copper, along with other metals like aluminum, nickel and zinc, all rose sharply in price. All have been in retreat in recent weeks as markets seek to find balance. 
3. Amazon Prime Day Surprise: COVID-19 Testing – The digital retail giant is gearing up for its annual mega-sale set for June 21-22. While consumers and investors should expect big deals and a profit boon from the event, Amazon has also dropped an early surprise, opening up its amazondx.com site for the general public for COVID-19 testing. The move is significant as the site was originally intended for Amazon employees and seems to be a leap forward in the company’s expansion into healthcare. Testing kits are available for under $40 and delivered in one day to most areas. 

Did You Know? 

A Little More on Inflation

The word “inflation” comes from the Latin term inflare, meaning to “blow up or inflate.” It was first used to describe monetary behavior back in 1838. Though its awareness has become global, there is still great contention on how to specifically measure it. In modern times, prices generally tend to increase over time, and deflationary periods only tend to occur during recessions or after a dramatic, abnormal jump in prices (similar to what we saw in lumber). Since the year 2000, the U.S. dollar has lost roughly 36% of its purchasing power.