over 3 years ago • 2 mins
The chairman of the US Federal Reserve is expected to announce a new era in the central bank’s approach to inflation on Thursday – but allowing price rises to “run hot” could see some investors scalded 🥵
The head of the Fed has overseen a busy couple of years since taking the helm in 2018. That December, the central bank raised interest rates again and made borrowing money more expensive in order to keep inflation around its long-term 2% target. A month later, however, the Fed paused further planned rate rises; by July, it was cutting them in a bid to keep the US economy expanding.
Now, in stark contrast to past policy, the central bank appears determined to push the rate at which prices rise higher. From being an oft-undershot ideal, 2% could become the “average inflation” target across an as-yet-unspecified period. When price rises have, as at present, been consistently lower, inflation may be allowed to run hotter for a while.
Interest rates will likely remain at rock bottom until that average is achieved – but the idea is that the Fed would then raise them and regain some room for maneuver in future economic crises. Whether that pans out as planned, however, is up for debate… 🤞
The Fed is intent on preventing the US from following in the footsteps of Japan and the eurozone – both of which have been plagued by persistent low growth and weak inflation. Its plan to support economic growth through greater flexibility on inflation should be good for American investors in the near term; all else equal, higher prices mean higher profits for companies.
But not everyone’s on board with the “average inflation” strategy – including some of the Fed’s governors. The central bank's already helped US stock prices recover from coronavirus, and the country’s economy is expected to rebound too. Some investors worry a little extra inflation could quickly turn into a lot – and the high interest rates required to rein price rises back in could bring the US economy to a standstill 🤦♂️
As seen in December 2018, such scares can lead to stocks selling off sharply. And one group of investors who may be particularly keen to avoid any further volatility in 2020 are the hedge funds who specialize in exactly that. Many of them have lost money this year due to, er, betting against volatility…
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.