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“What’s Your Prediction for the Fight? Prediction? Yes, Prediction. Pain.”

So went the exchange between Clubber Lang – played by the iconic Mr. T – and a reporter in 1982’s Rocky III as the reporter asked for Mr. T’s prediction of his upcoming fight with Rocky Balboa – played by the iconic Sylvester Stallone. Before we dig into this week’s Weekly Wire, I feel compelled to point out that my brothers and I – after viewing Rocky III in the local movie theater 40 years ago – promptly went home and cut the sleeves and the bottom half off every t-shirt we owned (those who have seen the movie will understand; our parents were not pleased).

What got us thinking about Clubber Lang’s prediction was Fed Chair Powell’s Jackson Hole speech in which he said the Fed – as it seeks to tamp down historically high inflation – expects to continue raising rates in a way that will cause some pain to the US economy. While we are having some fun with a great quote from a great movie, we don’t mean to dismiss the strain higher borrowing costs inflict on US companies and consumers, including the real risk of recession (and we might be in recession, even if one has not been declared by the National Bureau of Economic Research).

As we move into September, we think the appropriate path forward for monetary policy is much less clear than a few months ago. Consider the Fed has raised rates by 225 basis points this year (yet much of the impact from those hikes has yet to hit the economy); inflation is well above the Fed’s long-term target of 2%, but there is much evidence inflation has peaked and is moving lower (and the Fed’s preferred inflation index – the PCE – sits at 4.6%, just above the bank’s year-end target of 4.3%); several US economic datapoints have proven disappointing, but the consumer has remained resilient (our unemployment rate is just 3.5%), and the US 2 Year to US 10 Year Note section of the yield curve has inverted, which is a historic harbinger of recession (yet the Fed Fund’s rate has not moved above the yield on the US 10 Year Note, another historic harbinger of recession; see chart). We appreciate the Fed’s desire to restore price stability and applaud it. That said, we worry the Fed could go too far, too fast, and believe the bank should consider moderating the pace of interest rate hikes at its September meeting.

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The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital Investments, LLC, a registered investment advisor. 1609-BCI-9/6/2022

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