Up to this point we have really only seen in the markets what is known as policy risk. Policy risk refers to the implications of certain policy actions on the economy or financial markets.
Most notably in 2022, we’ve seen this risk in the form of monetary policy. Monetary policy is controlled by the Federal Reserve and what it does is it can raise or lower base interest rates (borrowing costs; the cost of money) and it controls the amount of monetary base.
Monetary policy has long and variable lags meaning a 0.25% jump in interest rates may not be felt in parts of the economy for 12 months. We are approaching 12 months from the first interest rate hike in 2022, and we are starting to see the cracks form. But we are also nearly to the end of interest rate hikes from here.
That means that we are transitioning from speculating on what the implications of monetary policies will do to seeing the implications in real-time.
All year we’ve had the anomaly of good news being bad news and bad news being good news. That is because good news meant that the economy wasn’t slowing. If the economy was still growing fast that meant the Federal Reserve had to raise interest rates higher, calling for more policy risk that sent markets lower. Growth risk is different but not by much. With growth risk, the good news is good news, and the bad news is bad news because you are watching the implications in real-time.
How can we serve you? We invite you to contact us today so we can help answer any questions you may have about your financial situation.