Fed might tighten cash coverage this 12 months, inflation dangers low

Federal Reserve chairman Jerome Powell said the central bank could start reversing its monetary policy as early as this year – predicting that inflation, while worrying, is temporary and will ease in the coming months.

At the Kansas City Federal Reserve Bank’s annual symposium, Powell highlighted job growth and economic recovery and said, “It may be appropriate to start slowing asset purchases this year.”

Powell added that the $ 120 billion reduction in monthly bond purchases shouldn’t hurt the economy. “Even after our stock purchases end, our increased holdings of long-term stocks will continue to support accommodative financial conditions,” he said.

Powell did not say when the Fed would hike rates – a topic of discussion at the September 21st Fed meeting – but suggested that it was not imminent. Ahead of a rate hike, Powell said the Fed would try to keep inflation at 2 percent and ensure employment growth is sustained.

The Delta variant turned the Fed’s plans to meet in person in Jackson Hole on its head – and could also undo all plans to hike interest rates.AP

“The timing and pace of the impending reduction in asset purchases is not intended to be a direct signal of the timing of future rate hikes,” added Powell.

Powell’s speech comes as the debate over inflation and bond purchases reaches a climax. On Thursday and Friday, four different Federal Reserve officials called for an end to policies as inflation spikes.

The meeting, which is typically held in Jackson Hole, Wyoming, was held virtually for the second year in a row. Conference organizers announced just last week that they were moving from a face-to-face event to a virtual format for fear of the ultra-contagious Delta variant.

The recent surge in coronavirus cases hampered both the conference and the Fed’s plans to slow the pace of bond purchases and potentially hike rates. Still, Powell said he believed Delta was only a “short-term” risk.

In a Friday morning interview with CNBC, Loretta J. Mester, President and CEO of the Federal Reserve Bank of Cleveland, said, “We just don’t need the same type of accommodation that we needed at the height of the crisis, and I’m comfortable with it we met our conditions. “

Chairman Jerome Powell’s message boosted markets – the Dow won more than 200 points after his speech.AP

Powell spent much of his speech discussing inflationary concerns, noting that responding to inflation can “do more harm than good” because inflation is often “transitory”.

“Inflation at this level is of course worrying. But that concern is mitigated by a number of factors that suggest these elevated levels are likely to prove temporary, ”he said.

Market watchers paid close attention to Powell’s remarks – and appeared largely satisfied with his message. After his speech, the Dow Jones industry average rose more than 227 points to 35,440.50 on Friday.

Learn how to discover increased rates of interest in your cash amid inflation worries

Your emergency savings could depreciate in value due to one thing: inflation.

The costs are increasing from gasoline, which rose 20% during the pandemic, to bacon, which rose 18.7%.

Meanwhile, persistently low interest rates make it difficult to get a return on your cash and keep your money in a place that is readily available.

While all eyes are on policy makers to see what steps they can take to mitigate the situation, you may want to reassess where your money is invested.

Keep it safe

While it is frustrating to know that you are not getting a high return on your money, the important thing to remember is that you want those funds to be there when you need them.

“If cash is intended for an emergency fund or a short-term spending, it must be kept safe,” said Ken Tumin, Founder and Editor of DepositAccounts.com.

“Stocks or Bitcoin or any other type of investment are not suitable,” he said.

When it comes to keeping your emergency fund safe, there are usually a handful of options: certificates of deposit, checking accounts, savings and money market accounts, and savings bonds.

Each has potential advantages and disadvantages.

Certificates of deposit

In general, it is not a good time to invest in CDs, Tumin said, as their prices are currently at an all-time low. If you invest now, you could set this rate for the long term.

That could lead to regrets if interest rates rise in the next year or two.

Note also with CDs: hard prepayment penalties. However, around a dozen online banks now offer CDs that won’t penalize you for withdrawing your money early, Tumin said.

As a result, it can be worth poking around.

“The only reason to get a CD would be if you could get significantly more than you can get for a savings account,” said Tumin.

Online accounts

High yield checking accounts

According to Tumin, around 1,200 US banks and credit unions currently offer high-yielding premium checking accounts.

More than 150 of them offer accounts that pay at least 3% interest on deposits of up to $ 10,000.

That exceeds the average savings account, which usually just earns 0.14% interest.

As with other accounts, these often come with some conditions, such as: B. Regular use of debit cards.

However, there are other potential benefits such as no monthly fee or 2% cashback on purchases up to $ 200 per month.

Savings bonds

SelectStock | Getty Images

According to Tumin, investing in I-bonds offers a particular advantage in today’s environment, as these are inflation-indexed.

Unlike some other investments, I-bonds allow you to defer federal taxes on the money until you pay it back or until you reach their 30-year maturity.

There are some tradeoffs, however. One disadvantage is that you are limited in how much you can invest per year. Currently the limit is $ 10,000.

You also cannot redeem the money within the first 12 months of the issue date. If you withdraw the money within the first five years, you could lose interest for three months. However, that surpasses the prepayment penalties for some five-year CDs that can earn interest for at least six months, Tumin noted.

Do your due diligence

As the demand for higher interest rates increases, new startups are pushing into this market. It is therefore particularly important to know how your deposits are protected.

FDIC insurance generally covers up to $ 250,000 when your institution fails. But not all accounts and companies are covered.

For example, cryptocurrency savings accounts usually do not offer any protection.

“I would consider this a high risk and not a place for your money,” said Tumin.

Also, check to see if the company is working with one or more banks to hold your deposits.

“The most important thing is to stay with fintechs that only work with one bank,” said Tumin.

Some clients of a company called Beam Financial found this out the hard way when they struggled to access their deposits last year. The company that had a model that involved working with multiple banks ended up being closed by the Federal Trade Commission from the conduct of banking business.

Economists eye surging cash provide as inflation fears mount

By Karen Brettell

(Reuters) – Some economists are warning that the rising money supply could exacerbate a surge in US inflation, which has been accelerating as fast as it has been for more than a decade.

According to the Center for Financial Stability’s (including Treasuries) Divisia M4 index, money supply – which measures the circulation of currencies and cash – rose 12% year over year in April.

The measure has run between 22% and 31% every month since April 2020, fueled by unprecedented economic stimulus from the US Federal Reserve and the US government. This contrasts with an annual growth of around 3-7%, which was common from 2015 to the beginning of 2020.

“This money supply growth is just so much faster than anything we’ve seen before,” said Desmond Lachman, resident fellow at the American Enterprise Institute. “It’s a reflection of a huge backlog in the economy … it’s hard for me to understand how not to get inflation.”

Money supply https://fingfx.thomsonreuters.com/gfx/mkt/yxmpjadyyvr/Divisia%20Index.JPG

Federal Reserve chairman Jerome Powell said Wednesday the Fed would adjust its policy if inflation expectations get too high, and the central bank is postponing its first forecast rate hike from 2024 to 2023.

So far, money supply growth has not been a major driver of inflationary pressures, in large part because banks hold cash as deposits.

The Fed has also downplayed the link between money supply and inflation, and Powell said in February that monetary measures had not been a major determinant of inflation “for a long time”.

In fact, the central bank’s bond purchases after the financial crisis did not trigger the expected inflation, as it took the economy years to recover and the money supply at that point was falling.

This time around, however, banks are struggling with record deposits after the US government increased government spending while the Federal Reserve purchases unprecedented amounts of bonds.

The story goes on

There is concern that businesses, investors and consumers are drawing up their deposits and spending, while banks increase lending as the economy reopens. Some economists fear that such a confluence of factors could lead to demand growing faster than economic output and prices rising.

Money supply growth was a factor in the high inflation in the 1970s, when the government ran budget deficits and the Fed introduced loose monetary policy to stimulate employment.

Bank reserves rose to a record $ 3.89 trillion in April and are projected to surpass $ 5 trillion this year as banks sell bonds to the central bank.

Meanwhile, commercial and industrial lending by commercial banks fell from a record $ 3.04 trillion in March 2020 to $ 2.55 trillion in May, although it continues to rise above the February 2.36 trillion level 2020 lie.

The Fed may be reluctant to hike rates as the Treasury Department struggles with record debt levels even if inflation rises, said William A. Barnett, director of the Center for Financial Stability.

However, if rates on primary market lending rise without interest rates on reserves rising accordingly, it could lead to an “explosion in lending,” Barnett said. “The risk to the economy is future inflation.”

Barnett believes that much of the Fed’s bond purchases will be permanent, effectively monetizing the debt, as it did during World War II, when most of the Fed’s bond purchases were irreversible.

The Fed has announced that it will eventually expire its bond purchases when the economy recovers, after which it will have to decide whether to decrease the overall size of its asset holdings when the bonds in its holdings mature.

When it “normalized” its policy from 2014 onwards, the Fed first reinvested maturing securities to keep its overall balance sheet constant, but then allowed the balance sheet to shrink.

This time around, the Fed is far from developing a plan to actually reduce its holdings.

However, some fear that if inflation is already rising, it may be too late to act.

Last week’s data showed that consumer prices rose 5% in May, the largest annual increase in 13 years.

“The rise in inflation could be a bit higher than the Fed has gambled away once inflation expectations are embedded in the system,” said Kim Rupert, managing director of Action Economics.

(Reporting by Karen Brettell; Editing by Dan Grebler)

Free cash and inflation within the time of COVID – Canon Metropolis Each day Document

No purchase required to enter or win! If you are unemployed and have been paid by state unemployment insurance for at least a week in the past month, you are entitled to between $ 1,200 and $ 1,600 in free, unearned money from current and future taxpayers. All you have to do is work full time for two months before you can quit and settle back in your chair and keep your winnings!

Colorado plans to spend between $ 36 million and $ 57 million on handouts to get about 40,000 adults to act like adults. Aren’t a well-earned paycheck and the dignity to provide for yourself and your family enough to get you back to work? Not ready to end your one year taxpayer paid vacation that you took after you left and you didn’t want to look for someone else? We’ll pay you to go back to work. There are around 282,000 active job postings on job boards so you have all options. Just give us two months of your time.

Already have a job and wondering how you can still make free money just by making adult decisions? You’re lucky. If You Get Vaccinated Against COVID-19 You Can Win A Million Dollars! Yes, by just doing the healthy thing and getting vaccinated against a contagious, potentially fatal disease, you can get rich from the taxpayer. The state of Colorado will award five lucky winners. Haven’t gotten around to getting the shot yet? Are you still enjoying those anti-vax conspiracy theories? You are the candidate the state is looking for. Get vaccinated next month and win, no purchase required.

Do not worry; the money comes from federal economic funds. It’s like Monopoly money, isn’t it? We can borrow and print as much as we want and there won’t be any consequences if it all fizzles out. Sure, future taxpayers are hooked, but who cares. That is her problem.

The pandemic spending added $ 5 trillion to the national debt, bringing the total to $ 28 trillion. The nation now owes more in goods and services than it creates each year (gross national product). Every day we pay $ 1 billion in interest on this debt. Investors, including foreign governments, are undoubtedly grateful. What could that billion dollars a day do for national parks, roads and bridges, national security, and cancer research? We will never know.

As long as we keep rates low, politicians can borrow and spend as much money as they want, right? Not so fast. Increasing debt will not only be a problem for future generations; we are already feeling the effects of irresponsible government policies. You may have noticed a small change in your grocery bill. That’s inflation, and it’s getting worse.

Economist Larry Summers, a former Clinton and Obama administration official, warns that government spending and low interest rates will fuel inflation. The Bureau of Labor Statistics recently reported that its price index for all consumer goods between March and April – saving food and energy – saw the largest monthly increase since April 1982. Food prices also rose, albeit to a lesser extent. The year-on-year comparison does not look good either. Compared to the previous year, prices have risen by 4.2 percent; this is the highest 12-month increase since 2008.

Inflation harms some people more than others. Low and middle income workers, their families, and fixed income seniors suffer from the same dollar buying less than the previous month. Those in Congress, the White House, and the governor’s mansion won’t notice the change that much. A six figure income protects you from the whims of the market. Only politicians can afford to give away borrowed money.

Krista L. Kafer is a weekly columnist for the Denver Post. Follow her on Twitter: @kristakafer.

To send a letter to the editor on this article, send on-line or take a look at ours Guidelines for transmission by email or post.

The place Buyers Are Placing Their Cash as Inflation Issues Develop

Text size

Funds that invest in financial stocks have attracted cash.

Photo by Amy Shamblen

Rising inflation expectations have sent remarkable flows of money into assets that could benefit from it. Some attract more money than others.

Funds invested in inflation-linked bonds whose face value increases in line with the consumer price index, have seen strong inflows since last May to a

Deutsche Bank

Report released on Friday. The amount of money poured into these funds last year was the highest since 2010.

Investors have shown a much greater interest in inflation-linked pension funds than they have in bonds in general. Not surprisingly, for most of the two decades or so since 1998, stocks and bond yields have shown a positive correlation. That is, when stock prices came under pressure, bond yields fell and prices rose. Allocating some of their assets to bonds gave investors a cushion as stock prices fell.

Recently, however, the pattern has not held up. The degree of correlation between bond yields and stocks has decreased since last August and has been negative since February. With stocks sold, bond prices have come under pressure as their yields have risen. This means that bonds may no longer be a good diversifier for portfolios, making them less attractive to many investors.

Historically, this flipped relationship was more likely to occur when inflation risks were paramount, as was the case in the three decades from the mid-1960s to the late 1990s, wrote Deutsche Bank strategist Parag Thatte. This is because inflation increases the possibility of monetary policy tightening, which is a risk for both stocks and bonds.

Funds that invest in energy and materials stocks that In an inflationary environment, performance is usually better and have suffered outflows in recent years, also seen strong inflows last year, especially since November. Financial equity funds, which typically benefit from rising interest rates with inflation, have also raised large sums of money.

Commodities are often viewed as a hedge against inflation, but investor confidence in the asset class seems to be weaker this time. Funds backed by physical commodities have mainly seen net outflows in the past few months, including oil-focused funds, gold funds and silver funds, according to the report. Industrial metals funds have bucked the trend recently and have seen some inflows this year, but investor interest is still quite modest.

Futures traders are not particularly bullish on commodities either, as their long positions, which benefit when prices rise, are within historical ranges. “While the price momentum is very positive, the volatility of the commodities is also very high, which has limited the exposure,” wrote Thatte in the Friday report.

Write to editors@barrons.com

On The Cash: Breaking down Biden’s $1.8T American Households Plan | Powell voices confidence in Fed’s deal with on inflation | Wall Road basks in ‘Biden increase’

Have a nice Wednesday and welcome back to On The Money, where we prepare for something else shared session experience. I’m Sylvan Lane, and here’s your nightly guide to everything to do with your bills, bank account, and bottom line.

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Write to us with tips, suggestions and news: slane@thehill.com, njagoda@thehill.com and nelis@thehill.com. Follow us on Twitter: @SylvanLane, @ NJagoda and @NivElis.

THE BIG DEAL – This is what Biden’s $ 1.8 billion plan for American families says: President BidenJoe BidenTulane adds Hunter Biden as a guest speaker on media polarization Trump on the resumption of MAGA rallies: report Biden’s inevitable foreign policy crisis MORE On Wednesday, the American Families Plan will be unveiled, an ambitious package that includes $ 1 trillion in new spending and $ 800 billion in tax credits aimed at increasing access to preschool and community colleges, as well as childcare and Extend health care significantly.

  • Biden will explain the proposal in a speech to a joint congressional session where he is expected to set his agenda for the coming months.
  • The centerpiece of the speech will be the Family Plan, which will be rolled out less than a month after Biden unveils a $ 2.3 trillion infrastructure proposal.

But we already have details of what Biden will propose tonight.

Education:

  • The American Families Plan has a $ 200 billion program that provides universal pre-kindergarten for all three- and four-year-olds.
  • $ 109 billion for a tuition-free community college for any American who wants it.
  • $ 85 billion to increase Pell grants for low-income and minority students.
  • More than $ 4 billion in major scholarships, certification, and support programs for teachers.

Tax credits:

  • The plan would build on the provisions of the American Rescue Plan by indefinitely extending the Affordable Care Act tax credits and making the extension of the childless worker tax credit permanent.
  • It would make the child tax credit permanent fully available to the families with the lowest incomes, while other aspects of credit expansion, such as increasing the loan amount, will expand through 2025.

The proposal includes the creation of a national program for paid family and sick leave, more funding for catering programs for children and low-income families, and reform of unemployment insurance. The Hill’s Brett Samuels and Morgan Chalfant break it open here.

The tax increases: All of these new investments will be accompanied by a number of proposed high income tax hikes which, on their own, could be a major political boost.

The Naomi Jagoda of the Hill leads us through Biden’s tax plan here.

Read more about the American Families Plan:

  • President Biden will speak to Congress on Wednesday evening tense terms with the business community for proposals to increase the corporate tax rate and nearly double the capital gains tax for high-income Americans.
  • Key Democratic lawmakers said Wednesday they would keep pushing for that full expansion The Presidential Tax Credit (CTC) is set to be permanent after President Biden released a proposal that would only cement part of the expansion.
  • The Treasury Department on Wednesday announced more details on President Biden’s proposal to increase IRS funding Strengthen compliance According to tax laws, these initiatives would generate net sales of $ 700 billion over a decade.

Run the day

Powell is confident the Fed can get inflation under control: Federal Reserve Chairman Jerome Powell said Wednesday that rising inflation will offset itself as one-off, pandemic-related statistical quirks and supply chain disruptions subside.

During a press conference, Powell argued that the recent spike in the rate of price increases is almost entirely due to economic activity picking up after the collapse during the coronavirus recession outbreak.

“We’ll likely see some upward pressure on prices,” Powell said after the Fed announced that it would keep rates near zero percent and maintain the current rate of bond purchases in the reopening process. ”I Explain why here.

The background:

  • The US is expected to grow between 6 and 8 percent in 2021 as it contains the spread of COVID-19 and brings millions of people back to work.
  • Critics fear Biden’s recent $ 1.9 trillion in economic aid, plans for future spending, and loose monetary policy from the Fed will boost inflation as the US is already booming.
  • The consumer price index (CPI), a closely watched indicator of inflation, rose 2.6 percent between March 2020 and last month, and minus food and energy costs 1.7 percent.

However, Powell said Wednesday that summer inflation would continue to rise due to two short-term factors: The statistical effect of comparing a fall in demand with a sharp surge in demand and congestion caused by the reopening of the global economy.

“An episode of one-off price increases in the reopening of the economy is not the same as and is unlikely to result in sustained higher inflation year over year into the future,” he said.

TO TAP TOMORROW:

  • The Senate Banking Committee will hold a hearing on “The Dignity of Work” at 10 a.m.
  • The Senate Finance Committee holds a social security hearing at 10 a.m. during the COVID-19 pandemic
  • A House Financial Services subcommittee will hold a hearing at 12:00 noon to close the racial and gender wealth gaps
  • A House Ways and Means subcommittee will hold a hearing on infrastructure investments at 1:30 p.m.

GOOD TO KNOW

BITS AND PIECES

Might The Delaware Valley Be Dealing with One other Period Of ’70s Model Inflation?

Talk of trillion dollar government spending plans and tight labor markets inspires speculation about the dreaded “me” word – inflation – and brings back painful memories of the Delaware Valley in the 1970s.

In Abington, 78-year-old Carol Gash recalls how she and her late husband, Dr. Arnold Gash, had trouble getting a mortgage after moving to the Philadelphia area when Dr. Gash retired from the Air Force.

“The interest rates were well over 10 percent,” she told DVJournal. “They were sky high. But my parents offered to give us a 10 percent mortgage, so we took it.” At its peak in October 1981, the 30-year mortgage hit 18.63 percent according to the Federal Reserve Bank of St. Louis. The Fed hiked rates to fight inflation that had plagued the economy for a decade. From 1974 to 1980 The annual inflation rate was 9.4 percentIn 1979 it was 13.3 percent.

And it is inflation, not interest rates, that worried Gash today. The Wall Street Journal reports that inflation – too many dollars chasing too little goods – accelerated in March due to a consolidating economy and rising energy prices. MarketWatch has taken inflation to a two and a half year high.

“Since I have a limited income, it bothers me more now than it did then,” said Gash. “It costs me a fortune to feed my child.” Her adult son is disabled and lives with her.

“It was crazy,” said Fred D’Ascenzo, 67, of Newtown, of this earlier period of inflation. “But I wasn’t worried. I knew it was cyclical.”

D’Ascenzo agrees with Gash on mortgage rates. He and his ex-wife bought a house in Drexel Hill in the 1970s and paid 14 percent interest. But if you had money in a money market account, you could get 10 or 12 percent interest, he added. However, the high mortgage rates caused the real estate market to stagnate.

“Buying a house or a car was ridiculous, the price of a loan,” said D’Ascenzo. “Everything you bought was crazy how much it cost.”

President Gerald Ford battled inflation with Whip Inflation Now (WIN) buttons, he recalled. In 1976, Ford was beaten up for election by Jimmy Carter, another president with a term who also failed to “whip” inflation.

But D’Ascenzo also sees higher prices these days, “especially for building materials, sawn timber, flooring. It doesn’t just creep up. You can’t get furniture. It’s crazy.”

Experts consider government spending to be a major inflationary factor.

“I think inflation is one of the major health issues in the American economy as so many dollars are being pumped into the economy through various COVID relief efforts,” said Jonathan Williams, an economist with the American Legislative Exchange Council (ALEC), one bipartisan organization of legislators in favor of limited government, free markets and federalism.

While COVID relief laws can help the unemployed to some extent, Williams warned that a national debt rapidly approaching $ 30 trillion is a cause for concern.

“The numbers are sure to go up,” Williams continued. “Anyone who recently went to the gas station to refill their tank has seen a sharp rise in gasoline prices, and this is just one example of a commodity that has been rising in prices recently.”

According to the AAA, the national average for a gallon of regular gasoline on April 21 was $ 2.87. Drivers paid roughly the same amount in late March, but the average for a gallon of regulars on April 21, 2020 was $ 1.80.

“For those who bought wood, aluminum, or copper for various home improvement projects, prices have gone up in those areas too,” Williams said.

And most of the raw material prices have gone up. In an April 22 tweet, Charlie Bilello, founder and CEO of Compound Capital Advisors, said that commodity prices were up year over year. Sawn timber up 265 percent; West Texas Intermediate (WTI) Crude Oil Up 210 Percent: Gasoline Up 182 Percent; Brent Crude Oil Up 163 Percent; Heating oil up 107 percent; Corn Up 84 Percent; Cooper up 83 percent; Soybeans Up 72 Percent; Silver Up 65 Percent; Sugar Up 59 Percent; Cotton Up 54 Percent; Platinum Up 52 Percent; Natural gas up 43 percent; Palladium Up 32 Percent; Wheat up 19 percent; Coffee by 13 percent and gold by 3 percent.

However, not everyone is concerned. At least one Federal Reserve president, Eric Rosengren of Boston, does not anticipate a worrying rise in inflation.

“As long as it’s in the 2 to 2.5 percent range, which I think is very likely in the next two years, I wouldn’t be particularly concerned,” Rosengren told the Wall Street Journal earlier this month. Still, that doesn’t satisfy former Treasury Secretary Larry Summers. Former Clinton cabinet member believes the Federal Reserve should raise concerns about the inflation outlook.

While a lot could happen between now and next year’s midterm elections, Williams believes the Democrats will be primarily to blame if inflation picks up too quickly. Democrats currently control the House, Senate, and the White House.

“Right now the numbers we’re seeing are on the higher end than recently, but still a bit in the moderate range,” said Williams. “The other bigger problem would be getting into a Japanese-style situation where, in some cases, there is stagflation or even deflation.”

The stagflation explained by Investopedia is characterized by slow economic growth and relatively high unemployment or economic stagnation, which is accompanied by rising prices.

“So, I think you have to look at the real problem of a combination of lack of economic growth and also combine that with inflationary pressures you get the stagflation we saw in the 1970s under Jimmy Carter, and that would be the worst. Case scenario think me for the American economy, “warns Williams. “Therefore, proposals like the one to increase corporate income taxes would be very detrimental to the economy and, in my opinion, would bring us closer to the problem of stagflation with lower growth and higher inflation.”

The Delaware Valley Journal provides unbiased, local reports for the Philadelphia suburbs of Bucks, Chester, Delaware, and Montgomery. For more stories from the Delaware Valley Journal, see DelawareValleyJournal.com

Thoughts on Cash: The renewed consideration to inflation | F. Marc Ruiz: Your Thoughts on Cash

In my professional opinion, the Federal Reserve has been able to aggressively expand the money supply in the economy not only because of the disinflationary forces of the 2008-2009 financial crisis, but also because of the globalization trend which tends to lead to a decline in the workforce and cost of production as well as some demographic trends in western Countries where the baby boom generation was spending less money when they retired and the giant millennial generation had not yet entered their highest-earning lifetime. These three trends together gave the Fed plenty of room to create and integrate new money into the economy without leading to a general rise in prices, also known as inflation.

Then came COVID, which in many ways resembled a combination of a natural disaster and a public policy crisis. On the natural disaster side, the COVID crisis was rapid, deep and temporary, much like a hurricane or earthquake. On the public order side, governments forcibly reduced economic activity to control the virus, resulting in a political disaster similar to a major war or permanent budget shutdown.

Lessons from the 2008-2009 period, the Fed, having had no inflation for the past decade, felt comfortable adding an unprecedented amount of new money to the economy and markets, and the federal government had learned from the perceived political as well Failures from 2008-2009 also got on the train, making direct payments to businesses, public services and households. Simply put, a lot of money being spent on many people in many ways.

Stimulus cash wanted, however notice inflation, taxes will rise | Enterprise

It was a year ago when the Dow bottomed out due to the COVID-19 pandemic. The average fell 34% from its mid-February high!

This was the fastest decline in history and temporarily halted an 11 year bull market. Then it took just six months to hit the February high and the Dow is now 75% off the bottom.

Both of these are very unusual facts that some people believe the stock market can only move in one direction. The story tells a different story. One way to describe the market could be walking up the stairs while playing with a yo-yo. The general direction is up, although there are a number of up and down cycles.

Often times, when your span of time is long enough, the stock market produces the greatest returns. Having to withdraw money during a down cycle can cause problems.

The rapid recovery and surge after the pandemic began was caused by an unprecedented amount of fiscal and monetary stimulus. The Federal Reserve cut historically low interest rates to near zero. It promised to ignore inflation and support the corporate debt market, and provided almost unlimited liquidity.

Congress spent huge sums of money that it did not have to start the virus-induced economic shutdowns. There have now been three direct citizen incentives and trillions of dollars of other spending on many things that aren’t even virus-related and that persist despite the growth of the economy. How long can this artificial environment last?

Now we’re being told that the nearly $ 2 trillion spent on just the last stimulus package is not enough and we should spend another $ 3 trillion on infrastructure. If we ran our households like this, we’d all be bankrupt. To see how fast the debt is growing, visit usdebtclock.org. Creepy!

We now hear screams to raise taxes on the rich. The problem is that there just aren’t enough people in that group. The place that is the ultimate destination and where the money is right now is IRAs and 401 (k) s, this is the only place Washington can find the money. Taxes will rise, but not just for the rich.

Inflation has to rise dramatically at some point. We can already see this in gasoline and lumber prices. Anyone who goes shopping seems to be seeing more inflation than official statistics. If inflation rises, the Fed will have no choice but to raise interest rates. This will not be beneficial for an already highly valued stock market.

We need to reward good financial behavior. Those who have saved have paid taxes and paid their debts. Most people have not taken out government loans or paid back loans as promised. I often hear from people: “Should I keep paying and be punished when others don’t?” That is a fair question.

Modern medicine is overcoming the tragic year 2020. These government expenditures were necessary and prudent. We developed vaccines in record time and secured the necessary supplies. We can see the end of the tunnel even though we are not quite there.

America is the strongest country in the world, but we have to make smart decisions and not pretend that one day we don’t have to pay the piper anytime soon. Reward good behavior, not bad. Realize that inflation and taxes must rise. The stock market is going to have a longer-term bear market at some point.

You have worked hard towards retirement all your life. Make sure you are ready for what may be the perfect storm.

Gary Boatman is a Monessen-based Certified Financial Planner and author of Your Financial Compass: Safe passage through the turbulent waters of Taxes, Income Planning and Market Volatility.

Why market’s manic strikes on Fed, inflation might not peak till summer time

Last week’s market action was another example of a push-and-pull between stocks, bonds, and the Federal Reserve that investors should expect more of over the course of 2021. Indeed, there is reason to believe that the battle for bond yields and inflation has hit stocks, investors may not peak until the summer.

The Dow Jones industry average hit another new entry last week – and Dow futures were strong on Sunday – as some of the sectors, including financial and industrial sectors, advocated a move away from growth and received further support from the new round of federal incentives, while the latest inflation figure was below estimates. The Nasdaq bounced back sharply and beaten up, great 2020 success stories like Tesla collected. Investors looking for the all-clear signal got no signal, however, as the tech sold out towards the end of the week and ten-year government bond yields hit a one-year high on Friday.

The Fed meeting on Tuesday and Wednesday of this week may Drive action on yields and growth stocksWith Fed chairman Jerome Powell expecting to maintain his cautious stance, some bond and stock market experts look a little further out from May to July to find a key position for investors. One key data point supports this view: inflation is projected to hit a year-long high in May and see a dramatic increase.

Federal Reserve Chairman Jerome Powell speaks during a House Select subcommittee on the coronavirus crisis hearing on September 23, 2020 in Washington, DC, United States.

Stefani Reynolds | Reuters

Action Economics predicts that consumer price index (CPI) gains will peak in May at 3.7% for the headline and 2.3% for core inflation. That shouldn’t come as a surprise. With the US celebrating its one-year anniversary since the pandemic began, it is the May-May comparison that captures the stalemate that hit the country last spring and is now used to add to inflationary pressures in May.

But even if that happens, the steep rise in inflation in the months ahead is likely to heighten investor concerns that the Fed is still underestimating the risks of upward inflation. It is only a matter of time before the economy is fully open and economic expansion occurs at a rate that drives inflation and interest rates high.

A worldly shift in interest rates and inflation

On Wall Street the belief is growing that one The era of low interest rates and low inflation is coming to an endand that a fundamental change is coming.

“We have had a very docile phase of interest and inflation and that is over,” said Lew Altfest of New York-based Altfest Personal Wealth Management. “The bottom has been set, and rates will rise again there, and inflation will rise too, but not as dramatically.”

“Speed ​​is what worries investors most,” said CFRA chief investment strategist Sam Stovall. “There will of course be an increase in inflation and we have been spoiled because it has been below two percent for many years.”

The inflation rate averaged 3.5% since 1950.

This week’s FOMC meeting will focus investors on what is known as the “scatter chart” – members’ prospects of when short-term rates are going to rise, and this may not change much, even if their members do not have as many members Members must switch views in order to move the median. But it’s the summer when the market will push the Fed on a higher inflation rate.

“It’s a pretty good bet that higher inflation, higher GDP and tightening are on the horizon,” said Mike Englund, chief executive officer and chief economist for action economics. “Powell won’t want to talk about it, but this sets the table for this summer discussion as inflation is peaking and the Fed gives no reason.”

Commodities and real estate prices

Action Economics now predicts that inflation growth will be moderate in the third and fourth quarters and that interest rates will average around 1.50% in the third and fourth quarters, taking into account movements in the CPI. But Englund is concerned.

“How reluctant is the Fed really,” he asked. “The Fed hasn’t had to put its money where its mouth is and say interest rates will stay low. … Perhaps the real risk is the second half of this year and a shift in rhetoric.”

Some of the year-over-year comparisons of inflation numbers, such as commodities plummeting last year, are to be expected.

“We know people will try to explain it as a comparative effect,” says Englund.

However, there are signs of sustained gains and a rise in residential property prices across various commodity sectors, which is not measured as part of core inflation but rather an economic impact of inflationary conditions. There are currently a record low supply of existing properties for sale.

These are inflationary pressures that make the June-July FOMC meeting and the biannual Congressional Monetary Policy Testimony on Capitol Hill the potentially more momentous Fed moments for the market.

As housing affordability falls and commodity prices rise, it will be harder to tell the public that there is no inflation problem. “It can fall on deaf ears in the summer when the Fed goes before Congress,” said Englund.

Altfest is reacting to real estate inflation in its investment outlook. His company sets up a residential real estate fund because it benefits from an inflationary environment. “Volatility in stocks will persist in the face of strong pluses and minuses, and hide in the private market, with an emphasis on cash returns rather than prices on a volatile stock market, which is comforting to people,” he said.

Investor sentiment amid impetus

History shows that as rates rise and inflation increases with economic activity, companies can pass price increases on to customers. Last week, investors were delighted to be able to tie four consecutive days of earnings together. According to Stovall, however, stock market investors were also spoiled by the strong performance of the shares. While the trajectory is still higher, the angle of ascent has decreased.

“If there was a guarantee that inflation and interest rates would only rise in the short term, and as we move past the second quarter, which looks drastically stronger than 2020, a guarantee for the second half of the year would bring inflation and interest rates down , investors don’t. ” be concerned, “he said.

However, economic growth could force the Fed to raise short-term interest rates faster than expected.

“That contributes to the agita,” said Stovall.

Altfest customers are split between the manic “Biden cops”, who see a time like the Roaring 20s ahead of them, and the depressed ones, the “Grantham bears”.

He says either can be right. Interest rates can continue to rise and corporate profits rise at the same time. More profits mean a better stock market, while higher interest rates put pressure on value for money and offer more opportunities.

For bonds to be a true competitor to stocks, interest rates must be above 3%, and by the time the market gets close to that, the bond market’s impact on stocks will be dwarfed by economic growth potential and the outlook for corporate earnings, according to Altfest. Value remains much cheaper than growth, even if these stocks and sectors have rallied since the fourth quarter of last year. However, it is more focused on foreign stocks, which are benefiting from increased global economic demand and have not moved as fast as the US market.

Stock sectors that work

For many investors, there may not be enough confidence to add stocks significantly as we near the Wall Street summer period when we sell and go in May. But there will also be more money on the sidelines that could flow into stock prices relatively soon, including stimulus payments to Americans who don’t need the money to cover daily expenses, and this could help prop up stock prices in the short term, said Stovall.

The attraction of reaching many Americans with urgent financial needs and including one of the greatest poverty reduction legislative efforts in decades, it has also reached many Americans with stimulus payments that brought it to market and increased savings. The country’s savings rate is at its highest level since World War II, and disposable income has seen its biggest gain in 14 years at 7%, doubling its 2019 profit. “And that was a boom year,” said Englund.

The “sale in May” theory is a misnomer. According to CFRA data, the average change in the price of stocks over the May to October period is better than the return on World War II cash, and 63% of stocks rose over the period. “If you’ve got a 50:50 chance and the average return is better than cash, why are there tax consequences of selling,” asked Stovall. “That’s why I always say that you are better off turning than pulling back.”

And for now, the stock market has been working through the rotation in value and out of technology for investors, although last week’s Nasdaq gains suggested investors there are looking for signs of stabilization. Industry performance since the S&P 500’s last correction in September 2020 shows that the top performing parts of the market have been energy, finance, materials and industrials.

“The very sectors that do best in a steeper yield curve environment,” said Stovall. “As the Fed continues to try not to hike rates, these are the sectors that are doing well.”

Investors who have already counted this market have proven wrong, and investors rarely give up on a trend that is working. Because of this, Stovall’s view remains “rotate rather than retreat” and make more money in value and out of growth as stock market investors continue to stick with companies operating in steeper yield curve environments.

He also pointed out a technical factor to watch before summer. On average, there is a 283 day period between S&P 500 declines of 5% or more, dating back to World War II. It’s been 190 days as of last week, which means the market isn’t “really due” for another 90 days – or in other words, the beginning of summer.

By the summer, the anecdotal evidence of prices will work against the Fed. A faster pace of recovery overseas, for example in the European economy, which has lagged behind the US, could also accelerate global demand and commodity markets.

For both inflation and the stock outlook, investors face a similar problem in the coming months: “You never know you will be at the top until you start the downward trend,” said Englund.