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Market expectations for Federal Reserve (“the Fed”) interest rate hikes shifted dramatically in the first quarter and not because inflation eased.

“Risk” is a something of a loaded word, having a somewhat negative implication. Most people only focus on the downside risk, and when we hear about “risky” investments it is typically in reference to penny stocks, cryptocurrencies, and other speculative instruments.

Happy Easter to you and your family!

We began the year with a mismatch in expectations between the market and the Federal Reserve (“the Fed”) regarding the projected path for interest rates. The Fed had penciled in a target terminal rate between 5-5.25%, which it planned on holding for the remainder of the year.

The recent banking crisis has immediately lowered expectations for future inflation expectations and interest rate hikes. Why? There is a direct correlation between economic activity and loan volume, and loan volume is destined for a short term contraction, at a minimum, as the regional banks, and even the big money center banks, reassess their positions and await whatever revised government regulation comes out of this banking crisis.

If you have tuned in to financial news, or any news for that matter, you are likely aware of the turmoil which began last week in the regional banking sector. It started when Silvergate Capital, a central lender to the cryptocurrency industry, sought a $2.25 billion loan to shore up its balance sheet. The move raised questions about the bank’s financial strength and triggered $42 billion in withdrawals.

We recently read how former Microsoft CEO and current owner of the Los Angeles Clippers Steve Balmer made the news for potentially violating IRS guidelines on how investment losses and gains are taxed. Balmer, with a net worth of roughly $81 billion, outsourced the management of his sizable investment portfolio to a large Wall Street bank. Unfortunately, trades executed by his investment manager in 2015 ran afoul of the ambiguous IRS guidelines covering wash sales.

The US economy has been surprisingly resilient, largely due to strong consumer spending driving economic growth despite persistent price increases for both goods and services. Rabid consumer demand has thus far kept US economic growth positive, and it appears we may avoid negative GDP growth in the first quarter, contrary to the projections of most major Wall Street banks.

“We should not look back unless it is to derive useful lessons from past errors, and for the purpose of profiting by dearly bought experience.”

– George Washington –

IMPORTANT – 2022 Tax Information Regarding your Pershing Taxable Accounts