August 01, 2023

Interest Rate and Inflation Overview, Update and Outlook

In this episode of Buckingham Weekly Perspectives, Head of Investment Research Jared Kizer provides an overview, update and outlook on interest rates and inflation as we head into August.


Jared Kizer: I wanted to jump on and provide an update of what we've seen in terms of interest rates and broader inflation readings within the economy as we head here into August. And we've certainly seen the last couple of months interesting developments on both the interest rate front and the inflation front.

How Will the Federal Reserve Handle Interest Rates?

Jared Kizer: So let's start with interest rates. So we've seen how the Federal Reserve, which through monetary policy, basically determines what short-term interest rates are in the broader U.S. economy and of course has an impact at the global economic level as well.

The Federal Funds Target Rate Has Increased

Jared Kizer: We've seen it now increase its federal funds target rate from 5.25% up to 5.50%. You can think of the federal funds rate as essentially the benchmark in the marketplace that sets essentially all other short-term interest rates. So if the Federal Reserve is trying to hit a target of 5.5% interest rate on that particular rate, you're now going to see, as we do that basically all other short-term interest rates are going to be north of 5% at this point and likely in the neighborhood of 5.5% or higher. So we're now in certainly a rate regime well above what we've seen over the last couple of years.

Will the Federal Reserve Continue to Increase the Federal Funds Rate?

Jared Kizer: We think about going forward. I think the go forward picture is very interesting in the sense of will we see the Federal Reserve keep increasing short term interest rates. That's one of the biggest economic questions currently out there and very muddled at this point. Whereas over past months it's basically been with each month with each meeting, there is a general expectation that rates were going to be increasing. I think harder to say at this point, given what we've seen and broader economic and inflation readings, whether we'll see additional increases in that short-term rate. So speaking of inflation, let's talk about what we've seen there over the last couple of months and generally good developments in seeing inflation moderate significantly out there in the U.S. economy. So if you look over the last two months of the months of May and June, the month-over-month inflation rates have been just a .1% in May and .2% in June. Those are very, very low month-over-month inflation readings and certainly seems to indicate that we're seeing inflation moderate. If you look back a little bit longer and say what have inflation rates been over the trailing 12 months, not just month-over-month, the last three readings have been an annual inflation rate of 5% down to 4% and then right around 3% in June with a trailing 12 months ending June 2023.

Inflation is Moderating

Jared Kizer: So certainly they're also indicating that we're seeing inflation moderate and hopefully that will continue. If we look forward and say, well, given that, what does the market expect inflation to be on a go forward basis? Relatively good news there as well.

Where Does the Market Expect Inflation to Land?

Jared Kizer: So if you look into the fixed income marketplace and asked that question, generally fixed income markets are expecting year-over-year inflation even over the longer term to be in that 2% to 2.5% range. So certainly the market is saying in addition to seeing inflation moderating in past data, it expects it to be relatively low going forward from here. So hopefully that's a good overview in terms of where we sit here in August in terms of short-term interest rates and inflation and expected inflation. If you have additional questions you'd like for us to tackle, feel free to reach out to your advisor and suggest questions in that way or click the link below and submit questions there as well. Thanks.

If you have any questions please feel free to drop us a note.

Sources: Inflation measures are the U.S. CPI Headline Inflation Rate reported by the U.S. Bureau of Labor Statistics (BLS). Federal fund rates are sourced from the Federal Reserve.

About the Author

Jared Kizer

Head of Investment Research

Jared Kizer is the Head of Investment Research for Buckingham Wealth Partners. In 2008, Jared co-authored the book "The Only Guide to Alternative Investments You’ll Ever Need" with financial author Larry Swedroe. Jared has written several articles on such topics as retirement planning and investment policy. His work has been published in The Journal of Portfolio Management, Journal of Indexes and Jared has made appearances on local and national television, including Bloomberg Television.

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