PEORIA MAGAZINE May 2022

Dr. Lewer : This is an important question for many reasons. Our economy is roughly 70 percent consumption-based, so changes in consumer behavior and sentiment are closely followed because they are critical to short-run GDP performance. While we have to wait a little bit longer for additional aggregate demand data to come in, initial trends suggest that American consumption and saving patterns aren’t changing. In fact, after the COVID-19 lockdown spike, personal savings rates stand at 6.3 percent, belowpre-pandemic levels . Amer ican hyper-consumer ism has its pros and cons. For example, Gordon Brown and John Gathergood’s (2020) article entitled “Consumption Changes, Not Income Changes, Predict Changes in Subjective Well-Being” finds that consumption — and in particular conspicuous consumption — significantly enhances subjective happiness. On the other hand, most economists would agree that we are below the optimal (or Golden Rule) rate of savings, and that a systemic increase in savings would result in greater physical investment and worker productivity. Harvard economist Philippe Aghion co-authored a piece entitled “When Does Domestic Saving Matter for Economic Growth?” which f inds that savings is associated with faster

economic growth through its positive impact on capital accumulation and innovation for al l countries, but especially developing ones. Lastly, I would encourage readers to go to my “The Enlightened Investor” YouTube channel, where we discuss the importance of saving and investing. The American public experiences a great deal of anxiety and stress due to their financial situation. In fact, The Employment Benefit Research Institute’s “2021 Retirement Confidence Survey” reports that more than half of American workers say their debt level is a problem. Andwhile Americans are feelingmore confident about having enough money for retirement due to the housing and equitymarket boom, the average person is retiring earlier than expected due to COVIDor structural changes atwork. For example, only 46 percent of American workers expect to retire before the age of 66, but statistics indicate that 74 percent of workers do retire before 66. With less time spent earning income, there is a heightened urgency for Americans to save asmuch as they can, while they can! PM : What’s your view of the Fed’s interest rate increases as a corrective action for inf lation, relative to other possible remedies? Can you give us a primer on what assumptions are

in play behind such moves? What might some of the unintended consequences be? Dr. Lewer : The Federal Reserve has been wrong about the duration and magnitude of inf lation pressures. While there are economic headwinds and Grey Swan events like the war in Ukraine to consider, the number one priority for the Federal Reserve should be to restore price-stability credibility so that inflation expectations don’t become unanchored. Unfortunately for everyone, inflation fighting is a nasty business. Contrac tionary monetary policies are blunt and dampen both aggregate demand and aggregate production. Today, Bridgewater Associates founder and co-chief investment officer Ray Dalio states, “We’re going to have a period of stagflation.” Stagflation is a period of time of weak economic growth cou pled with rising inflation and interest rates. This is a possible outcome. Notably, the Federal Reserve did provide some guidance with its “Dot Plot” forecast released in March indicating that they expect to raise Federal Funds interest rates from their current 0.25 percent range up to 1.75 percent or 2 percent by the end of the year. Longer-term rates like the 30-year fixedmortgage have already responded, shooting up from 3.1 percent at the end of 2021 to 4.7 percent in early April 2022. Look for rates to continue moving up as the Federal Reserve implements its plan. Housing and other sectors will feel the pinch. That being said, I am hoping for inflation toreachan inflectionpoint later this summer and slowly work its way down. With all the monetary stimulus associated with the pandemic, coupled with persistent supply/labor constraints, a quick end to our inflation problem is unlikely. In the meantime, what should investors do? The key is to stick to your plan. Remain vigilant and focused on your long-run financial objectives. Elevated inf lation periods such as these, while worrisome, are just noise over the long-run investing horizon of individual investors.

Personal Saving Rate

35

30

25

20

Percent

15

10

5

0

1960

1970

1980

1990

2000

2010

2020

Shaded areas indicate U.S. recessions. fred.stlouisfed.org Personal savings rate from 1959 to 2021 (Source: U.S. Bureau of Economic Analysis) Source: U.S. Bureau of Economic Analysis

MAY 2022 P EORIA MAGAZINE 77