Inflation Just Hit a 13-Year High and Investors Are Worried

So in the past week, the Federal Reserve has had their little meeting and decided to keep interest rates exactly where they are until their next meeting.

So for those that don't know, the Fed meets eight times per year to discuss monetary policy. With interest rates so low, the stock market's so high, and inflation creeping up, all eyes have been on Jerome Powell and the Federal Open Market Committee to see what they decide to do from meeting to meeting. It's massive news, and it is always, always on the front page of CNBC, even if they decide to do absolutely nothing.

So in this video, we're going to discuss what happened at this meeting, how bad inflation is getting, and why do investors even care about this stuff.

So let's jump in. This video is sponsored by Stake. Download the Stake app today and use the referral code AWC to get a free stock when you fund your account. Details in the description.

So yes, the Federal Open Market Committee has had their meeting for the month of June, and at a high level, these were the main takeaways.

So number one, interest rates remain unchanged. Two, the Fed will continue to buy 120 billion dollars worth of assets per month as stimulus. This is broken down into roughly 80 billion dollars in treasuries and 40 billion dollars of mortgage-backed securities. Then number three, they increased their forecast for inflation this year from 2.4 to 3.4 percent, and that sounds small, but it's definitely not insignificant.

Then number four, GDP growth is estimated at seven percent instead of six point five percent, and the number five forecast for unemployment remains unchanged at four and a half percent. So what's the news here? Doesn't sound that remarkable, and honestly, it's not.

Everybody expected rates to remain unchanged; everybody expected the stimulus. The thing that people were really interested in, I guess, is the inflation side of things because the Federal Reserve holds the tools to control inflation. If inflation rises, they can control it by raising interest rates, but that's obviously not helpful for stock market investors.

So ultimately, when it comes to inflation, the ball is in their court. What's interesting is that the FOMC likes to keep inflation at two percent per year; that's comfortable. This is literally plucked from their website. It says, "The Federal Open Market Committee (FOMC) judges that inflation of two percent over the longer run, as measured by the annual change in price index for personal consumption expenditures, is most consistent with the Federal Reserve's mandate for maximum employment and price stability." That's kind of their M.O. to promote maximum employment and price stability.

So the Fed wants two percent, but at their most recent meeting, guess what? They acknowledged that inflation is here, and hey, we thought it was going to be around our target of 2, but now we think it's going to creep up to 3.4 percent. That's a fair chunk above what we're comfortable with. I sure as hell hope it doesn't continue like this and get up into the four percent or the five percent range.

Now also along that same line, another thing that's been making big headlines from the meeting is that the Fed has pulled forward their expected time frame for the interest rate hikes. The Fed now expects that they'll be raising interest rates one year earlier than what they had previously forecast. They now believe rates will go up in 2023 instead of their previously stated 2024.

But in fact, from the meeting, seven of the 12 Fed officials see a rate increase sometime next year. Now if we rewind the clock back just to last quarter, only four of them thought that would be necessary. So the signs are there that the Fed is acknowledging that, yep, inflation is getting worse, and they see it.

But even though that's all on the table now, Jerome Powell still continues to downplay inflation. But honestly, it's for a good reason because he really just doesn't want to freak people out. He knows how many people are listening to what he says. Even just his tone of voice is going to have an impact, and at the end of the day, a lot of funds with big money will be making investment decisions based on what he says and how he says it.

So that's why for that reason this time around in reference to inflation, he said, "You can think of this meeting that we had as the talking about talking about meeting," and what that means, as CNBC notes. Powell said in a phrase that recalled the statement he made a year ago that the Fed wasn't thinking about thinking about raising rates.

From the same article here, it says, "Though the Fed raised its headline inflation expectation to 3.4, a full percentage point higher than the March projection, the post-meeting statement continued to say that inflationary pressures are transitory." The raised expectations come amid the biggest rise in consumer prices in about 13 years.

So what's that about? Well, I delved into the inflation statistics, and this article is bang on. So remember, inflation is measured by the consumer price index, which tracks the price changes in many categories of consumer products and then simplifies it all into one index. For example, it includes things like food, housing, apparel, transportation, medical care, things like that.

Now if we look at the 12 month change in the American CPI, it's risen 5% in the past 12 months. Now that is the steepest rise in consumer prices since July 2008 during the time of the global financial crisis. Honestly, it makes sense. We've already been hearing about this in the media; it's now just the Federal Reserve is having to talk about it too, and because they're the ones that pull the levers, now everybody is listening.

For example, one of America's most important companies is Berkshire Hathaway, led by Warren Buffett, of course. They own and operate many, many businesses throughout America under that Berkshire Hathaway name. This was Warren Buffett warning us early last month that this stuff was definitely happening: "We're seeing very substantial inflation. It's very interesting. I mean, we're raising prices; people are raising prices to us, and it's being accepted. You know, take home building. I mean, you know the cost of—we've got nine home builders in addition to our manufactured housing, and our operation, which is the largest in the country—so we really do a lot of housing. The costs are just up, up, up. Steel costs, you know, just every day they're going up. But there's more inflation going on than quite a bit more inflation going on than people would have anticipated of just six months ago or thereabouts."

Michael Burry also warned of the Great American inflation story that's just around the corner before he went dark on Twitter and deleted all of his posts. You know, people are warning us, and now even the Fed is acknowledging that inflation's getting outside the bounds of where they normally like to see it.

So lastly, I wanted to touch on why does this even matter for us as investors? Why do we care that inflation is rising? Well, as I said before, the way the central bank slows down inflation is by raising interest rates, putting the brakes on the economy.

Now at a big money level, raising rates means that new risk-free bonds become more enticing. As interest rates rise, more and more money flows out of stocks and into bonds. What we've been seeing over the past few years is just the exact opposite. As interest rates fall, now bonds really aren't providing much of a return at all, so money flows into stocks instead.

It's kind of like a self-fulfilling prophecy in a weird way because all of that money flowing into stocks pushes the market up higher. But flip the story, and if rates rise, then money flows out of stocks and prices come down, and obviously that's not what investors want.

So that's one part of the story, but then the second factor is that interest rates determine how cheap or expensive it is to access borrowed money. In a low-interest rate environment, borrowed money is very easy to access. This means consumers have more money to spend on stuff that is made by the businesses we invest in, but it also means that businesses can fund growth opportunities without too much stress when it comes to their interest payments. So it's a good time for business to flourish.

But then on the other hand, if inflation rises and interest rates are hyped up, then all of a sudden borrowed money is more expensive to access. That means that more of the consumer's income goes to debt repayments through things like credit cards, mortgages, etc., and that leaves less money left over for discretionary spending.

And then for businesses, those big growth plans are now also harder to fund because they come with a larger interest expense. So overall, that is why investors are paying very close attention to inflation and are also keeping a very close eye on what the Federal Reserve is saying and doing from meeting to meeting.

It's kind of funny that, you know, even though the news basically says from meeting to meeting interest rates stay the same, everything just remains unchanged, there's still—it's still like headline news, front page news.

But anyway, guys, that will do us for this video. I hope you enjoyed it. I hope you got something out of it. I hope it taught you something.

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