Inflation, Interest Rates, And The Fed

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Inflation can be defined as a general increase in prices and a fall in the purchase price of money. If not kept under control, inflation can hinder economic growth and result in lower standard of living of individuals. As it stands now, inflationary pressures persist in the US economy, with some pressures proving less temporary than others. According to CNBC, one such permanent area pertains to energy prices as Americans are now paying the highest amount at the gas pump since October 2014. Furthermore, the average price of a regular gallon of gasoline in the US is currently 55%. More than a year ago. Other sectors, such as housing and travel, are proving more transitory and are related to the initial surge in demand following the economic re-opening from the COVID-19 pandemic.

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Overall inflation is on the rise, regardless of whether inflation is temporary or not. Consider that the Consumer Price Index (CPI), the widely recognized barometer of inflation, rose 6.2% on a year-on-year basis in October, the highest annual gain in 31 years! This record level of inflation presents challenges to the economic recovery and has become a major concern for consumers across the country. That concern is evident in the November reading of the University of Michigan’s consumer sentiment index, which fell to its lowest level in a decade of 66.8. The survey showed that consumers expect an even higher inflation rate going forward, with the 12-month forecast rising to 4.9%.

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With inflation so high and economic growth remaining so strong (for now), many investors are rightly questioning why the Federal Reserve (Fed) is not moving quickly to raise interest rates. To answer this question, we must first recognize that the Fed currently believes that inflation will begin to moderate in 2022. Second, we must place interest rates within the context of the Federal Reserve’s overall “TNT” approach to handling inflation, promoting full employment. and helping the economy fully recover from the COVID-19 pandemic.

, Teaaper – Reduce your current bond purchases by approximately $120 billion per month. In early November, the Fed announced that they would begin their gradual tapering plan later this month, buying $10 billion less each month from the US Treasury and $5 billion less of mortgage-backed securities.

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, narrow – Reduce the current size of your $8 trillion+ balance sheet through the sale of bonds. Fed Chair Powell indicated that the Fed wants to begin the taper process first, before considering reducing the sheer size of the Fed balance sheet. Up until this idea, $105 billion a month in additional bonds (As a result of announcements in early Novembert) Will continue to increase the size of the Balance Sheet till further tapering commences.

, Teato lighten – Raise the Fed Funds target rate from its current 0.00% – 0.25% range. Despite some on Wall Street calling for two rate hikes of 25 bp each (ie 0.25%) in 2022 and two additional rates of 25 bp each in 2023, we find ourselves agreeing with the most recent “dot plot” chart. inspire to be (look down) suggests a rate hike of 25 bp from the Fed in 2022 and, potentially, an additional rate hike of 25 bp each in 2023. As a background tool, the “Dot Plot” chart is published quarterly and summarizes the Federal Open Market Committee’s (FOMC’s) outlook for the federal funds rate.

Fed’s “Dot Plot” Chart

While it is clear from the above chart that we are moving into a rising rate environment; For the foreseeable future, interest rates are still likely to remain at historically low levels. In addition, rising rates must accompany the continued expansion of the US economy. Otherwise, the Fed will not consider raising interest rates.

Investors should not necessarily fear inflation nor rising interest rates during this economic recovery, but should plan their investment portfolio strategies and, accordingly, their growth and/or income objectives, investment timelines and One must be mindful of risk tolerance. For example, market sectors that have performed relatively well during previous periods of economic expansion that may coincide with a rising rate environment include, but are not limited to, US and international equities, High yield bonds, and some investment grade bonds such as municipal bonds.

Inflation, interest rates and the Federal Reserve are just a few of the many moving and often confusing pieces of the capital market puzzle. As a result, we, at Henion & Walsh, recommend that investors work with experienced investment professionals to evaluate these moving pieces and help them create and manage the asset classes within their investment portfolios. Happy Thanksgiving, everyone!


Henion & Walsh Asset Management currently has allocations within its managed funds program, and Henion & Walsh currently has allocations within some SmartTrusts. Unit investment trusts (UITs) are in line with many portfolio management ideas for the idea cited above.

Past performance does not guarantee future results. We have obtained this information from sources that we believe to be reliable and accurate. Henion & Walsh cannot guarantee the accuracy of the said information and cannot be held liable. You can not invest directly in an index. Diversification can help reduce risk and volatility in your portfolio but does not ensure gains or guarantees against losses.


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