By Craig Erwin, Ph.D.
The Federal Reserve (the U.S. central bank) is charged with maintaining full employment and ensuring stable prices for necessities. The Fed must also maintain stable long-term interest rates. For the most part, the Fed does not care about real estate, Bitcoin, or stock prices; it is interested the prices of items that households buy and consume regularly. Since the unemployment rate is low at 4%, interest rates have been very low for years, and inflation is at the highest level in decades. As a result, for the foreseeable future, the Fed will likely stay focused on keeping the prices of goods that households consume stable. Since it doesn’t need to worry about interest rates or unemployment now, the Fed can direct all of its energy to knocking down inflation. We may need to be a bit wary because it’s been years since the Fed had to worry about inflation; its inflation fighting skills may be a bit rusty.
The Fed’s inflation fighting actions could have unintended consequences, such as changing the types of stocks and bonds investors favor. The Fed has been pretty predictable for years, but now we can expect it to throw some curveballs our way. Buckle your seat belts, investors. We may be in for a bumpy year.
Have you noticed that prices have been rising? If so, which prices have risen? Are you planning on changing your investing approach because the Fed is suddenly alarmed about inflation?
For more information on the Federal Reserve, inflation, the economy, and investing, click on the following links:
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