Inflation Leads, Interest Rates Follow

Matthew Allgood |



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The Federal Reserve’s dual mandate is to promote maximum employment and stable prices (control inflation). They pursue these goals through changes in the Fed Funds Rate. In 2022, they began raising rates to combat inflation, which has been decreasing back toward their target of 2%.


While the Fed is cautious to avoid cutting rates too soon and risking a resurgence of inflation, market participants consider a Fed Funds rate higher than the inflation rate (as seen in the chart below) to be highly restrictive. So, rate cuts to support the maximum employment part of the Fed mandate are expected by the market participants. 


While the future of the market is unpredictable, we believe our disciplined investment process can guide investors through changing market conditions.


Inflation Leads, Interest Rates Follow



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Source: Bloomberg, Redwood. Data as of 6/21/2024. Date range from 6/30/2019 – 5/31/2024.



Allgood Financial

Disclosure: This piece is for informational purposes only and contains opinions of Redwood that should not be construed as facts. Information provided herein from third parties is obtained from sources believed to be reliable, but no reservation or warranty is made as to its accuracy or completeness. Charts and graphs are for illustrative purposes only. Discussion of any specific strategy is not intended as a guarantee of profit or loss. Past performance is not a guarantee of future results. The objectives mentioned are not guaranteed to be achieved. Investors cannot invest directly in any of the indices mentioned above. Consumer Price Index (CPI) measures the overall change in consumer prices based on a representative basket of goods and services over time. Core Consumer Price Index measures the changes in the price of goods and services, excluding food and energy. Benchmark Interest Rate is represented by the Federal Funds Target Rate - Upper Bound which is the short-term interest rate targeted by the Federal Reserve's Federal Open Market Committee (FOMC) as part of its monetary policy.


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