Close your eyes, take a deep breath and imagine you’re an elite rock climber, maybe not Alex Honnold (of Free Solo fame) climbing thousands of feet up without gear elite but very good.
You are working your way up a nearly sheer granite face, your forearms burning and your fingers aching as you are climbing at the very top of your abilities.
You take a deep breath and reach for the next hold…You reach it! You bend your fingers on the miniscule edge and lock in the hold. As you press off your toes and pull on your newly acquired hold to make the next move, your arms start to shake and POOF your hand pops off the hold and the ground (briefly) rushes towards you until your protective rope and harness catches you.
You were so close to making the next move, you had the hold it was just that your grip was either slightly not strong enough or your body was just slightly too heavy. This is a tightrope one must walk in rock climbing known as the strength-to-weight ratio and is not unlike the balance that the Federal Reserve (or Fed for short) must find to battle inflation while maintaining a reasonable unemployment rate among many other things.
Tools – To Battle Inflation or Rock Climb Better
Back to your rock climb – you (safely) fell, it happens, in fact it happens all the time which you might have noticed in this Summer’s Olympic sport climbing among the world’s best climbers. The most common reason boils down to the aforementioned strength-to-weight ratio in that you were either not strong enough for your weight or your weight was slightly too much for your strength.
Faced with this dilemma you have two options available to you:
- You increase your strength
- You decrease your weight
Now neither of these options are easy to accomplish as we all likely know from all too many post-December-holiday New Year’s resolutions but, depending on the person and their unique genetic circumstances, one may be easier to control than the other.
When it comes to the economy, there are numerous variables that are entirely uncontrollable but, not unlike the ability to lose some LB’s or put on some additional muscle, the Fed has the ability to curb inflation by increasing interest rates which has the intended effect of limiting spending.
As you may recall, there was a global shutdown roughly four and half years ago that shook up the economy and during that time consumer spending went down significantly. To avoid an economic crash, interest rates dropped to historical low’s and people received stimulus checks so as to encourage spending and keep the economy afloat.
This plan worked almost too well and as the world began to open up so did our wallets so in 2022 Jerome Powell, the chair of the Federal Reserve, laid out a plan to regulate inflation that included a necessary hike in interest rates. Powell also acknowledged at that time that, as a result of this plan, we may face some “pain in the form of higher unemployment and slower growth” but all in pursuit of an overall healthier and stable US economy.
Stable Inflation & Fed Rates Moving Forward
Earlier this Summer it was announced that this mission has been accomplished so the Fed will begin cutting interest rates again. As a foil to what happened in 2022, this should see spending begin to increase, more jobs should be added to the economy and inflation should stabilize.
All this to say that the economy, our investments, our retirement funds, and our overall economic outlook is just fine despite what some social media or sensational headlines might want you to believe. What we’ve seen recently in the economy and job market is not a direct result of the political climate or foreign influences but simply the execution of a long-term plan that smarter people than I have put in motion.
Inflation in of itself is not a bad thing, in fact a 2% inflation rate is a sign of a healthy and growing economy and where we want it to be in a perfect world.
So just a friendly reminder to breathe and focus on those things within your control to keep climbing towards your financial goals. Because even if we fall a few feet back for every dozen we go up, given enough time we can all reach the summit of financial freedom.