With higher than average inflation likely to last into 2022, The Fed will likely taper soon then raise interest rates in 2022. I discuss actions we can take to mitigate the declining buying power of our money.
With the sheer amounts of fiscal and monetary stimulus that we’ve had since March 2020, it’s no wonder we’re seeing rising inflation that is higher than average. There are signs that this will likely last throughout 2022 and I also discuss what you can do about it!
You’ve probably noticed that you’re paying more at the gas pump, in restaurants, or at the grocery store. I discuss some significant inflation, interest rate, and economic trends going on in the US and in the world.
Fed Chair Jerome Powell said on 10/22/21 that supply-side constraints have worsened, which is creating more inflation risk. In order to curb inflationary forces, The Fed is expected to announce in November 2021 the new taper program.
This means they will begin to pare back or taper on the US Treasury bond and mortgage-backed securities asset-buying program they’ve had in place since March 2020 to stimulate the economy.
It looks like the economy has been recovering enough that The Fed appears to be more comfortable with pumping less money into the economy, which means they’re OK with starting to taper off the current Quantitative Easing (QE) program.
Instead of continuing to buy $120 billion / month of bonds worth, they’ll reduce this by $15 billion / month likely from November 2021 through June 2022 and be done with the QE monetary stimulus.
This will all set the stage for increasing interest rates in the later half of 2022. Even though Jerome Powell believes it’s time to taper, he believes it’s not yet time to raise interest rates. Some economists are projecting we’ll see two interest rate hikes in 2022, to as high as the Federal Funds Rate being in the 0.50% to 0.75% range. Then we might see a whole 1% rate by 2023!
As consumers, you and I are living through these supply chain constraints because we know it’s been massively disrupted throughout the world. This is manifesting in things like cargo ships lingering in southern California ports and they are unable to dock, delaying bringing goods to shore.
This means it’s either taking longer for us to receive goods or we’re paying higher prices for them. All these supply chain bottlenecks are leading to higher inflation rates and The Fed knows these bottlenecks will be here for a while longer.
Jerome Powell has changed his tune from back in June 2021 when he and other Fed members said that high inflation was transitory or temporary. We’re dealing with way more inflation than any of us would like to have and it’s not going away quickly.
The Fed is stuck between a rock and a hard place because as much as inflation is running above their ideal target of around 2%, they’re trying to balance monetary policy while giving enough time to allow those working in hurt industries (hotels, leisure travel, entertainment, and more) to get their jobs back. On the other hand, the whole population is having to pay more for goods and services with higher inflation.
When The Fed has to deliberately raise interest rates to curb inflation, this will likely slow the demand for goods and services. It’s a delicate balance between trying to reach maximum employment while maintaining price stability with interest rates.
Consumer Price Index (CPI) Inflation is often measured on a year-on-year change, and throughout summer 2021 it was above the 5% mark and in September 2021 it was at 5.4%.
As worrying as that sign of inflation is, another sign that is worrying investors is the 10-Year Breakeven Inflation Rate of 2.64% is projected to be the average inflation amount for the next decade. We haven’t seen this rate since 2011 and 2012.
Even though CPI is high, The Fed actually cares about the Personal Consumption Expenditure (PCE) index of inflation.
The Fed has a dual mandate of 1) maximum employment and 2) moderate long term interest rates and price stability because they manage the interest rates and money supply in circulation. As of September 2021, the unemployment rate was at 4.8% while PCE inflation was at 2.03% in August 2021. It appears The Fed isn’t expecting these figures to normalize within 2021 as unemployment and inflation will remain higher.
I discuss how prices are higher for the following items: used cars, laptops (computer chip shortage), gasoline, natural gas, bacon, orange juice, eggs, chicken, beef, and bread.
Internationally we’re seeing a lot of economies starting to struggle with Australia teetering on the edge of recession and China’s economy starting to slow down. South Korea and New Zealand have raised their interest rates.
The US could be impacted by some of these global macroeconomic trends so everyday Americans could be affected down the line.
I have a few ideas of what we can do about rising inflation, and they include: 1) Bulk up on groceries, preferably at wholesale prices, 2) Ask for a raise at work or find ways to make more money to offset increasing costs, and 3) Invest as wisely as you can, and 4) Get your holiday shopping done early if supplies run out!
If you’re interested in learning how to take control of your finances and start becoming an investor like Warren Buffett, check out my free PDF guide.
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