Don’t forget even a little inflation can do a number on your purchasing power. Be an inflation fighter, not a victim. Inflation is down but not out, and the market is looking for any reason to cut, so inflation could come right back if the Fed cuts too soon. Nick Timiraos reports in The Wall Street Journal:
Federal Reserve officials start the year with a problem they would ordinarily love to have: Inflation has fallen much faster than expected.
It does, nonetheless, pose a conundrum. The reason: If inflation has sustainably returned to the Fed’s 2% target, then real rates—nominal rates adjusted for inflation—have risen and might be restricting economic activity too much. This means the Fed needs to cut interest rates. The question is, when and by how much.
The Fed won’t cut at its two-day meeting ending this Wednesday because the economy has been growing solidly. While inflation excluding food and energy on a monthly basis has been at or below 2% in six of the last seven months, the Fed wants to be sure that can be sustained before cutting rates.
Instead, Fed officials are likely to take a symbolically important step this week by no longer signaling in their policy statement that rates are more likely to rise than fall. Ditching this so-called tightening bias would affirm that officials are entertaining lower rates in the coming months.
Normally, the Fed cuts interest rates because economic activity is slowing sharply. Not this time: Growth remained surprisingly robust through the end of last year. Rather, they are mulling whether softening inflation means real interest rates will be unnecessarily restrictive if they don’t act.
Action Line: By most measures, inflation is still running higher than the Fed’s 2% target rate. Preparing for inflation is important. Become an inflation dodger in your portfolio. When you want help, I’m here. In the meantime, click here to subscribe to my free monthly Survive & Thrive letter.
E.J. Smith - Your Survival Guy
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