November 2023 / VIDEO
Decoding the Fed’s ‘higher for longer’ narrative
David shares his thoughts on the Fed’s efforts to curb inflation and bring interest rates down within the context of an election year.
Transcript
Recorded 27 September 2023.
The Fed keeps saying higher for longer. So how does the Fed stop inflation? How do they? So the Fed pumped massive amounts of money into the global economy. Unbelievable amounts of money, right. And it doesn't go away. You know, people talk about a lot of times like ‘oh the consumer’s running out of savings’. Where did the money go? It went to someone else's balance sheet, right? It goes from your balance sheet to someone else's until that person puts it into T-bills, until it ultimately goes into T-bills. It's in the economy, right. So it takes a really long time to get this money out.
Now, the election comment is it's tricky in the US when you have an election because I don't think the Fed wants to be aggressively cutting interest rates past Q1 because basically if you're aggressively cutting interest rates into an election, you're putting a chicken in everyone's pot, right.
You're basically trying to re accelerate the economy for the incumbent or at least that's what your opponent's going to see, right? So the Fed's sort of in this tricky spot, right? They want higher for longer, they need the savings to go into T-bills.
They know inflation's coming down, but it's still pretty high, right? And so they're trying to play this game where they keep higher for longer and we glide towards 2% over a long period of time. Now how long that is really matters for equity investors, because if you have 3% inflation in an economy, if you own stocks that can pass that inflation on, they probably grow 10% top line, right? And if they can pass it on through their cost structure, right, if they're not hurt by inflation, which some companies aren't right, they're going to have also earnings growth higher than sales growth.
So inflation for the right kind of companies, inflation for energy companies is not a bad thing, right? If you don't have too much, right? And that's, that's this idea of soft landing. So the idea of higher for longer and soft landing kind of go together. If we can glide at a controlled level of inflation, equities can be a good place to invest, right?
I think what's interesting about what the Fed is, I think when the Fed says higher for longer, they're saying own cash and equities. I think that's what they're saying. They're saying own cash and equities and it you know, it'll be OK. Put your cash into T-bills so I can suck some of this cash out and own equities because you're going to grow at a reasonable pace because we're going to have 3% inflation, right? We're going to have, you know, 3½ going to 3 or going to high 2s.
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November 2023 / INVESTMENT INSIGHTS
David Eiswert is a portfolio manager in the U.S. Equity Division of T. Rowe Price. He is the portfolio manager for the Global Focused Growth Equity Strategy, a role he has held since October 1, 2012. Prior to his current role, Mr. Eiswert was the portfolio manager for the Global Technology Strategy from October 2008 until May 2012. He was a technology analyst from 2003 until 2012. Mr. Eiswert is a vice president of T. Rowe Price Group, Inc.