By: Bill and Cindi Porter, AILERON INVESTMENT ADVISORS
Q: Does the Federal Reserve affect my investments?
A: Absolutely! With little fanfare in the media, in August the Federal Reserve made two huge pronouncements that should cause every investor to stop and ponder.1 First, the Fed (Federal Reserve) announced it would no longer act as it has in the past to control inflation. Instead it will use a new averaging formula to allow inflation to run at a higher rate that will help them achieve the 2% goal.
Since inflation reduces the value of our money, you will need to earn more money just to stay even.
The Fed has two core mandates – one to control employment and the other to stabilize inflation. Half of its reason to exist essentially moved over to a new framework.
Doubling down on this news, the Fed also announced that it would keep interest rates at their nearly nonexistent rate indefinitely. Banks, money market accounts, and any other interest-related assets will be paying historically low rates for quite some time and do not offer investors a viable investment option since inflation is being encouraged to run at a higher rate. Whenever your rate of return is less than inflation, you lose the buying power of your money. Bank’s rates and inflation rates are deliberately being separated which could be a detriment to American investors.
The banking community is a worldwide network. In many important countries such as Germany, interest rates are not low – they are negative. Instead of receiving interest, you must pay the bank a fee to hold your funds. If the Fed moves in this same direction, it is important for you to be prepared. As the Wall Street Journal reported,2 “The truth is that it is a leap into the monetary unknown and potentially a very expensive one.”
The good news is that there are tools to help deal with this problem. A serious discussion with your trusted advisor would be a good first step in preparation for the new rules of the marketplace.
1 Jeff Cox, August 27, 2020, CNBC.
2 Wall Street Journal, August 28, 2020.
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All the information in this letter is published in good faith and for general information purposes only. We do not make any warranties about the completeness, reliability and accuracy of this information. Any action you take upon the information is strictly at your own risk.