The Fed approved a big change to its inflation target at its virtual Jackson Hole Symposium last week. They are now willing to let inflation run past 2% with a goal of achieving an average of 2% inflation over time. They will no longer look to aggressively raise interest rates out of recessions to head off inflation. What does this mean for you?
First, it means short-term interest rates may stay lower for longer than we are used to coming out of this recession. Don’t leave too much money in cash to protect you from rising interest rates. Cash pays nothing today. Do keep what you intend to spend soon in cash, just don’t have too much there.
Second, it means there may be a period where inflation is rising for a period time and your short-term bonds aren’t keeping up. That’s okay. You hold those bonds for stability. You can afford to fall a little behind inflation for a little while.
Third, it means bonds will be more unpredictable going forward. If you aspired to outsmart the bond market, don’t even try. The days of predictable Fed interest rate hikes are over. I’m sure they’ll try to telegraph their moves to bring some stability, but the usual playbook has changed.
A little bit of inflation isn’t a bad thing. The Fed recognizes that and is trying something new. Our approach to this inflation uncertainty is to have a diversified bond portfolio and avoid long-term bonds. If you want to know more about what that looks like, reach out to me.
About the Author: John O’Connor
John has more than ten years experience as an Investment Advisor. He focuses on devising and maintaining portfolios that meet individuals’ needs, investment research, and investment strategy. John has been recognized as a “FIVE STAR wealth manager” by Twin Cities Business Magazine 2016-2020.Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. CTW gathers its data from sources it considers reliable. However, CTW makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.