On March 28, 2007, then Federal Reserve Chairman Ben Bernanke famously told Congress that he believed the problems in the subprime mortgage market were likely to be “contained.” One year later the global financial crisis was in full swing. I am hoping the current Fed Chairman Jerome Powell’s testimony that inflation will be “transitory” does not go on to live in the same infamy.
It is no secret that our nation’s housing market is running hot. The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index recently reported that home prices in March were up 13.2% from a year ago. This is the highest increase since December 2005 during the housing bubble. Supply is low, and demand is high. Adding fuel to the fire is the Federal Reserve, which is purchasing in excess of $120 billion per month of Treasury and mortgage-backed securities in an effort to provide liquidity and keep interest rates low. Why the Fed is continuing these stimulus measures implemented early last summer to combat the COVID crisis economic downturn is beyond me. Alas, the Fed has a perhaps undeserved reputation of creating as many economic and financial market bubbles as it fixes.
In addition to price stability, the Federal Reserve’s second mandate from Congress is to maximize employment. Unemployment and continuing claims for jobless benefits remain elevated. At the same time, job openings are at a record high. A good portion of this dichotomy has been attributed to our government having extended additional unemployment benefits until September 2021. Employers are battling for workers with the government, which is paying people tax-free to not work. The result? Employers are having to increase salaries to lure workers back to the workplace, and are even offering signing bonuses. With wages being the largest expense for most businesses, the inevitable result will be higher prices for goods and services. With wage increases being permanent, this inflation will not be transitory.
We got a glimpse two weeks ago of the financial market volatility that can be expected as news comes out that inflation is picking up. While financial market and investment portfolio volatility will always be unavoidable, there are investment strategies that can be implemented which historically have helped investment portfolios during periods of rising inflation.
Glenn S. Rank, CIMA®
Certified Investment Management Analyst®
President