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THREADING THE NEEDLE

By: Tony Minopoli

As regular readers know, I spend a lot of time thinking about employment and inflation. Over the last few days, I attended the annual meeting of our General Agents and provided the group with a brief economic review. While “everyone” knows that interest rates were up in 2023, many do not realize that the 10-year Treasury yield ended the year at virtually the same level it started. When we focus on managing the insurance assets of the Knights of Columbus General Account, we must always think very long term because the underlying policies are often long term in nature as well. Put another way, we need to manage today’s assets to meet future liabilities. For that reason, we have to be careful when considering interest rates and their path.

Then we flipped the calendar to the new year, and as of the January 10th close, the 10-year Treasury yield had increased about 15 basis points from year end, to 4.03%. All the financial press today is focused on data releases that may provide clues as to the next move for inflation. In one of my last blog posts – “The Last Mile” – I focused on the difficulty the Fed would have in tamping inflation down the last 1 percentage point in order to achieve their 2% target. Can it be done? Sure, it can. Just rewind the tape to see what Paul Volcker did in the early 1980’s when the Fed Funds rate soared to over 20%. I have often quipped that the solve for inflation is pretty easy, painful for sure, but pretty easy. Simply raise short-term rates until a recession is induced, and inflation will come down. The Fed is not simply trying to solve for inflation, they are attempting to take the heat out of the economy without destroying the underpinnings of employment.

In a certain sense, many hopeful people were sounding the victory signal as the Fed dramatically reduced inflation from over 9% to nearly 3%. The problem is that employment, wages, and spending have remained robust in the face of this big move. We are also interested in the coming Federal Reserve Statistical Releases because they will provide another data point as to how well the battle with inflation is being waged. When the employment information came out last week many pundits talked about the absolute strength of the labor market. However, upon further review, we found that the previous months had been revised downward along with other fissures appearing in the employment landscape.

If employment softens at the margins and spending slows, the Fed could achieve the solve required to move inflation closer to the mark. Unfortunately, with the Houthi rebels causing havoc with transportation in the Red Sea, that could impact supply chains and thus inflation. On a positive note, energy has receded slightly, given the build in U.S. crude inventories.

Bottom line, these next few months are going to be critical for the inflation fight. Beyond the normal challenges, the war in Ukraine, the conflict in Gaza, and the rising brazenness of the Houthis will add a few more degrees of difficulty. Stay tuned.

This commentary has been prepared by Knights of Columbus Asset Advisors (“KoCAA”) for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions and information expressed herein reflect our judgment and are subject to change without notice. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) increasing levels of loan defaults, (5) changes in laws and regulations, and (6) changes in the policies of governments and/or regulatory authorities.

KoCAA is an SEC registered investment adviser that maintains a principal place of business in the State of Connecticut. For information about KoCAA’s business operations, please consult the Firm’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website at adviserinfo.sec.gov. KoCAA is a wholly owned subsidiary of Knights of Columbus, one of the world’s largest Catholic Lay Organizations. Investing involves risk and you may gain or lose money on your investments. For additional information visit KoCAA.com or write to kofcfunds@kofcassetadvisors.org.