The Fed Updated Its Inflation Policy

The Fed Updated Its Inflation Policy

over 3 years ago2 mins

Late last week, the US Federal Reserve (the Fed) revealed changes to how it’ll think about inflation, jobs, and the country’s interest rates for years to come 🤔

What does this mean?

One of the Fed’s responsibilities is to maintain stable prices, and it reckons that’s when they’re increasing by 2% every year. But after years of that inflation sitting below its target, the central bank said it’d be willing to let the measure track above 2% for a while as long as, over time, it’s 2% on average.

Source: Bloomberg
Source: Bloomberg

In practice, that means the Fed won’t be as quick to increase interest rates as it’s been in the past. Higher interest rates, remember, discourage spending by making saving more appealing, and any subsequent drop in demand for products keeps prices from rising so quickly 🏦 But that means higher rates have also historically slowed companies’ hiring. So if rates are staying low, there’s less reason not to bring fresh faces in – good news for the 11% of unemployed Americans.

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Why should I care?

Low rates should help stocks too: they offer more potential returns than bonds, which aren’t paying out much interest right now. Then again, the US’s biggest tech companies have been responsible for most of US stocks’ recent gains, and it remains to be seen whether a rising tide lifts the smaller boats too 🌊 Investors might fancy emerging markets as well: stocks in those countries are cheaper on average than elsewhere globally, and their bonds – often denominated in US dollars – might get cheaper if the dollar stays weak.

Low rates also make buying a house more attractive since your mortgage will probably be cheaper for longer 🏡 Of course, you don’t have to splash out on bricks and mortar: investing in real estate either via listed trusts (a.k.a. REITs) or new-age fintech platforms are ways to get involved with smaller sums.

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