It’s been two years since the U.S. economy began to experience a dramatic rise in inflation. Consumers continue to feel its impact, and the outlook for the financial markets and economy remains uncertain. Since the middle of last year, the U.S. Federal Reserve has taken aggressive actions to ease inflation through a steady increase in interest rates. While inflation has declined from its peak levels of last summer, it remains well above the Fed’s target of around 2%. Along with increased borrowing costs across the economy, we have also been affected by bank failures, debt ceiling drama and the ongoing war in Ukraine. So, where does this leave consumers and the markets?

Bank failures lead to tightened lending

In early March, it appeared the Fed was on target to continue its focus on aggressive interest rate hikes and keeping rates higher for a longer period in 2023 to bring down prices by reducing consumer demand. Then, instability hit the banking sector, with the failure of Silicon Valley Bank, a mid-sized bank in California, followed by Signature Bank and First Republic Bank. Across the pond in Europe, UBS took over Swiss rival Credit Suisse Group. With the banking system generally healthier than it was heading into the 2008 financial crisis, and the risk of financial contagion largely in the rearview mirror, focus has turned to a contraction in bank lending, which may put further pressure on the economy.

Impact on the financial markets

Through the end of May, the S&P 500^® Index was up more than 9%, and the bond market was up over 2%. While these advances have been welcome, after the declines in both equity and bond markets last year, we would caution that the equity market has been driven almost entirely by large technology stocks, particularly those tied in some way to artificial intelligence (AI). Broader measures of stock market performance continue to lag, and many investors are still expecting the U.S. economy to slip into recession later this year.

Is inflation finally on the decline?

Inflation has eased in recent months, declining from a high of 9% last summer to slightly below 5% for the 12-month period ending in April. While this represents progress, the Fed remains well above its committed target rate of 2% inflation, despite 10 interest rate hikes in the past year.

Although lower inflation has provided some relief to consumers, they are still feeling the pinch. The Consumer Price Index declined to 4.9% for April as high prices for some essential services and goods, such as food, finally began to ease. However, these were somewhat offset by increases in prices for gas, used cars and housing, with the latter being one of the largest contributing factors of inflationary pressure. It is expected that the Fed may skip another rate hike at its meeting in mid-June, but remains ready to continue raising rates as needed. Given recent inflation readings, and with the labor market remaining tight, odds are that the Fed could very well be back at it again soon.

Stay focused on long-term goals

The recent issues in the banking sector are just the latest illustration of why trying to predict the direction of the financial markets based on short-term events is impossible—and can prove costly when making investment decisions.

For individuals participating in retirement saving plans, having a long-term investment strategy that aligns with your risk tolerance and time horizon, and continuing to make regular contributions to your portfolio, is the best way to manage through uncertain times and ensure that you stay on the right path toward a financially secure future.

Joseph Gaffoglio is the President of Mutual of America Capital Management LLC.

The views expressed in this article are subject to change at any time based on market and other conditions and should not be construed as a recommendation. This article contains forward-looking statements, which speak only as of the date they were made and involve risks and uncertainties that could cause actual results to differ materially from those expressed herein. Readers are cautioned not to rely on our forward-looking statements. This content is for informational purposes only and not intended to be investment advice.

Mutual of America Capital Management LLC is an indirect, wholly owned subsidiary of Mutual of America Life Insurance Company.