The Azucena Take: What if the Feds Take a Hawkish Approach

Current events in the market (be it good or bad) are not something we could easily ignore and hope it goes away. Case in point being the topic of rising interest rates, inflation along with concerns of a possible recession. With the Federal Reserve announcing they will be raising interest rates to combat inflation, there have been talks about them adopting a hawkish approach.

During last month's meeting, the Federal Reserve also proposed a reversal of some of its policies that were put in place in 2021. One such plan would be switching from quantitative easing to quantitative tightening.

What is quantitative easing and tightening? 

Quantitative Easing (QE) is a monetary policy in which the central bank purchases long term-securities from the open market. This increases the money supply to encourage investing. 

Quantitative Tightening (QT) is a monetary policy in which the central bank reduces its purchase of securities from the open market.

When the pandemic hit, the Federal Reserve doubled its purchases of securities from $4.6 trillion to $8 trillion. Starting in 2022; they are going to reverse that trend to bring down inflation and reduce the chance of a yield curve inversion. While no timetable has been set, the plan is to reduce purchases by $95 billion a month.

Taking a Hawkish Approach

Do realize that the Federal Reserve is going to be walking on a tight rope. On one hand, they want to bring inflation under control but they also want to avoid triggering a recession. So long as the short-term interest rates stay below the long-term rates, this should prevent a recession. Plus most of the economic conditions for a recession are not present.

While the risk of a recession is present, investors have to realize that the economy is still going strong. As of April 2022:

  • +1.7 million jobs have been added

  • Unemployment is at 3.6%

  • YOY Growth is at +5.6%

  • Retail Sales are up by 16%

Even if a recession does happen, it won't be like the 2008 Crash or the COVID-19 recession of 2020. Investors should expect a recession like the one from the early 90's.

What Should Investors Do?

The big takeaway for investors should be not to hyper focus on something that might or might not happen. Inflation and rising interest rates should be an investor's top concern at the moment. Regarding the possibility of a recession, one needs to position themselves in a way that the hit does little damage in both the short and long term.   

The Azucena Take provides an inside look into the investment real estate market using the research done and data collected by Marcus & Millichap

Carlos Azucena