Disinflation and Possible Financial Outcomes Through 2026?
At this writing, Inflation has plummeted from 9.1% annually to 3% according to the Consumer Price Index (CPI) annual measure. According to the Federal Reserve most recent projections, by 2026 the Federal Funds Rate is likely to be near 2%. So far, Gross Domestic Product (GDP) economic growth has remained healthy, near 2%, despite prevalent headlines of a “Looming Recession.”
A Potential Magic Carpet Ride for High Cash Flow Assets?
In previous Disinflation cycles, after reaching the peak Federal Funds Rate to control inflation, the Federal Reserve begins to return interest rates to normal. Net present value of future cash flows is higher when the competing discount rate is lowered.
After 18 months of pressure on investment asset prices, the path to normal cash rates of 2-3% instead of over 5%, is likely to bring higher values for high cash flow assets including:
- Discounted Global High Yield Bond Funds
- Energy Infrastructure Assets
- and, Dividend Companies
Perspective Reversal of Prior Investor Pessimism?
Cautious optimism appears to have contributed to the legendary successes of Warren Buffet and Sir John Templeton. The negative equity market forecasts in late 2022, including economic contraction, so far have been proven wrong. Investors who enjoyed positive outcomes in the first half of 2023 appear to have shifted into a more optimistic perspective for now.