AN ECONOMIC OUTLOOK
Money Matters
By Keith Sessions, AMA Chief Financial Officer | keithsessions@hotmail.com
You will read this in April, but as I type, inflation was reported at a 7.5% annualized rate. This is the highest it has been since 1982. I wrote a few months ago that I was concerned about looming inflation and its impact on our organization. I still have that concern. Many of the vendors who supply us have raised their rates. This includes commodities, such as paper, and services, including our auditors. Some providers refuse to even bid on a project if it is more than a couple of months out.
AMA finished 2021 with a strong balance sheet. Cost cutting and additional revenue from increased membership have given us a good position to weather the upcoming storm. How long that storm lasts is yet to be determined. The Federal Open Market Committee (e.g., “the Fed”) is addressing inflation head on.
We were initially told that inflation would be “transitory.” To some degree, I agree with this. It is important to note that what the Fed means by transitory and what most people think it means are two different things. When the Fed says transitory, it means that inflation will not have a long-term impact on our economy. What most people think it means is that it will be gone in a couple of months. It won’t.
Right now, the Fed is preparing to tighten the monetary supply. This is done two ways. First is to stop the bond purchase program that was put in place in 2020. Each month, the Fed was buying $80 billion worth of U.S. Treasury bonds and $40 billion worth of mortgages, keeping intermediate to long-term interest rates low. That set off a blazing-hot housing market and kept companies borrowing money for projects and expansions. As this tightens, the expectation is to slow the housing marketing market and cool off the economy.
The second tool of the Fed is the Fed Funds Rate, currently at basically zero. Very few actually use the Fed Funds Rate because it is what banks charge other banks for overnight lending. This has a ripple effect as it is increased or decreased. Right now, the Fed is saying we should expect three rate increases. The market is pricing in between three and four. The initial rate increase is expected in March (before this column will be published).
My biggest concern right now is an overreach by the Fed. This would be an overtightening of the monetary supply, resulting in an extreme slowdown of the economy. Movements by the Fed take a very long time to show up in the economic numbers.
Non-farm payrolls, one of the first economic indicators published each month, has long been the canary of the economy. Today, that report is not as telling as it was pre-COVID. It can take 12 months or more to really see the impact of a monetary policy change on inflation and on parts of the economy. The inflation we see now is partially the result of loose monetary policy enacted in 2020. Unique attributes of the pandemic make up the rest.
Before I get emails about politics, let me state that is not political. In 2020, shortly before COVID-19 hit, we were looking at Fed Rate hikes. At the beginning of the pandemic, our representatives in Congress—on both sides of the aisle—had very hard decisions to make. They could be slow to react, trying to get things perfect, and watching the economy quickly grind to a halt as we saw in the early 1930s.
The other option was to be quick to react, make mistakes, offer a loose monetary policy, and keep the economy going, knowing that we would eventually have to deal with inflation. There was no “right” answer. Sometimes you just have to pick your cleanest dirty pair.
As a disclosure, none of this should be construed as advice. For your finances, please talk to a professional who knows your specific situation and circumstances.
If anyone has read all the way through this article, I want to point out that it is April and warming up. Go outside and fly. You have much better things to do. I look forward to seeing many of you at Joe Nall Week at Triple Tree Aerodrome in Woodruff, South Carolina, and other events.
