The Inflation Narrative

5 minute
Inflation arrow and money

Markets remain very unsettled and not-for-profit healthcare issuance remains relatively light. Curve shape continues to transition as the long end of the markets anticipate and respond to the Fed’s actions at the short end. Volatility in debt and equity markets will continue until there is a tighter convergence between Fed policy and expectations on inflation and growth across the broader economy and markets.


1 Year

5 Year

10 Year

30 Year

 June 17 – Treasury





v. June 3

+ 70 bps

+ 38 bps

+ 28 bps

+ 17 bps

June 17 – MMD*





v. June 3

+ 25 bps

+ 35 bps

+ 48 bps

+ 60 bps

June 17 – MMD/UST





v. June 3





*Note: MMD assumes 5.00% coupon

SIFMA reset this week at 0.97%, which is approximately 0.60% of 1-Month LIBOR and represents a 29 basis point adjustment versus the June 1 reset.

Controlling the Narrative

The Federal Reserve raised the Fed Funds Rate by 75 basis points on Wednesday to a target range of 1.50% - 1.75%. This was higher than the 50 basis point move that was telegraphed at their last meeting and represents the biggest one-time rate hike since 1994. Fed members also indicated a more aggressive policy stance, offering a median expectation that rates will increase an additional 175 basis points to reach 3.375% by year-end 2022. Just as a reminder, the Fed Funds target rate on December 31, 2021, was 0% - 0.25%. Wow.

Narratives have always been important; capital markets are fueled by translating data into perception. An important question is whether the Fed is losing—or has perhaps already lost—control over the inflation narrative. After the “inflation as transitory” miss, the narrative shifted to engineering a “soft landing” in which the Fed would withdraw enough liquidity to curb inflation while avoiding a recession. This remains the Fed’s stated expectation, but the recent rate hike feels like a capitulation to broad indications of declining confidence—aka, perception—based on the idea that the Fed is behind and that the landing is going to be hard:

  • The University of Michigan Consumer Sentiment index fell to a record low in June; the economic conditions subindex also sank to an all-time low, while the expectations gauge reached its lowest point since May 1980.
  • The small-business-oriented National Federation of Independent Business (NFIB) Optimism Index fell to a 48-year low in May, continuing a five-month roll of declining confidence.
  • The large-business-oriented Business Roundtable second quarter CEO survey remained above historical averages but posted the sixth largest quarterly decline in the 20-year history of the index.
  • The large-business-oriented Conference Board survey of 750 CEOs and other C-Suite leaders found that 60% of respondents anticipate a recession in their geographic region in the next 12 to 18 months.

The quote of the week was Fed Chairman Powell’s comment that while the Fed was not trying to engineer a recession, “you really cannot have the kind of labor market we want without price stability, and we have to go back and establish price stability so that we can have that kind of labor market.” I think if Mel Brooks were Mr. Powell’s speechwriter, he might have simplified it all by riffing on the Chief of Police in Young Frankenstein: “A recession is an ugly thing and I think it’s about time we have one.”

Speaking of Labor Markets

Pulling into O’Hare the other day, my seatmate and I started a conversation that led to sharing what each of us does for work. Turns out he has a “family office,” which is today’s code for being a private investor. It also turns out that his family office owns an array of staffing companies, including one focused on healthcare. No surprise, he is ecstatic with his investment, and while he anticipates there may be some moderation in booking rates, he doesn’t see anything on the horizon that will sour him on the fundamental business.

Part of what we talked about is the broader reset in the U.S. labor market, which is highlighted by materially lower participation rates. Where unemployment rates measure the number of workers who are actively looking for work, participation rates measure the total number of us who are either working or actively looking for work.

US Labor Participation Rate chart

As the chart demonstrates, the U.S. labor participation rate has been declining for a long time (baby boom demographics) but it plummeted during COVID and hasn’t come close to fully recovering. If this is a structural reset and harbinger of the future, then the collective U.S. economy is going to have a hard time organically achieving the twin goals of growth and price (wage) stability. This is a type of reset that Fed policy is not going to solve, unless the net result of inflation or recession drives people who seemingly have left the work force to rejoin the party.

The scenario might be even more challenging for healthcare, given its reliance on a specially trained labor force. As if on cue, a June 15 article in Becker’s noted Sanford Health’s plan to hire more than 700 internationally trained nurses, from the Philippines, Brazil, Canada, and Mexico (something Henry Ford initiated earlier in the year). The interesting thought is that globalization fueled the supply side of much of the consumer-led U.S. economy, even as our own labor participation rates declined; so are we on the cusp of globalizing the labor force of a completely domestic subeconomy?

The same day as my “strangers on a plane” conversation, I got a note from my colleague Terri Wareham noting that recent check-in conversations with clients were characterizing May as another rough month for operations. Our National Hospital Flash Report with May data won’t come out until the last week of June, but anecdotal indications are that operating performance remains stressed. Stagflation—the pairing of inflation with no growth or contraction—is threatening the macroeconomy, but it sure feels like this describes what has been happening across the healthcare subeconomy for most of 2022.

Stabilization is going to be a long slog, likely leading to a restructured healthcare operating model. The one certainty is that organizations aren’t going to wait for the Fed to fix things but will instead experiment with different responses and figure out how to move forward. Foundational keys remain:

  1. Effective resource management that assembles and positions all available and accessible resources across the organization;
  2. Financial planning paired with continuous performance improvement to optimize the performance of every retained resource; and
  3. Strategic planning that includes a restructuring mindset that guides the imperatives of effective resource positioning and enterprise performance improvement.

We’ll be taking a break over the July 4th weekend, so look for our next blog on Saturday, July 9. I hope you all have a chance to enjoy the holiday with family and friends.

Trending in Healthcare Treasury and Capital Markets is a biweekly blog providing updates on changes in the capital markets and insights on the implications of industry trends for Treasury operations, authored by Kaufman Hall Managing Director Eric Jordahl.

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