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Inflation and Interest Rates

During the third quarter, investors continued to focus on inflation and interest rates. The Personal Consumption Index (PCE), which excludes volatile food and energy prices, increased 3.9% for the quarter. This was the first time in 2 years the index dropped below 4%, indicating some cooling in the inflation rate. However, the Fed said the inflation rate was still too high and it would maintain its current stance on interest rates. The stock market reacted negatively with the S&P Index declining 3.27% for the quarter, while the yield on 20-year U. S. Treasury Bond has reached the highest level in 20 years, yielding over 5%.

Inflation does remain a concern however, the good news is, the U. S. economy remains stronger than expected under restrictive Federal Reserve monetary policy. In addition, employment remains healthy, with recent unemployment data coming in better than expected. While there is concern that the restrictive Fed policy may eventually cause a recession, the resulting higher interest rates are providing returns on fixed income investments not seen for several years.

Markets are likely to remain volatile as we watch the economic scenario unfold. Investor focus will continue to be on inflation and interest rates, while political issues and the debt ceiling compete for headlines.

For our part, we will continue to monitor risk and maintain high quality investments in client portfolios. We will try to use volatility to our long-term advantage as opportunities arise.


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