Weekend Reading: Don’t Panic About the Fed (Maybe)
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This article appears as part of Casey Weade's Weekend Reading for Retirees series. Every Friday, Casey highlights four hand-picked articles on trending retirement topics and delivers them straight to your email inbox. Get on the list here.
Today’s inflation is causing a domino effect. To combat steep prices, the Fed is slowly raising interest rates, and as a result, we’re seeing low bond fund returns. All this being said, you might wonder, how far could it go?
READ THE ARTICLE| Take forecasts with a grain of salt: It comes with no surprise that estimates are across the board. According to money markets, short-term interest rates are predicted to sit around 3.5 percent a year from now. On the other hand, Deutsche Bank is predicting rates could go up to six percent. In an already unpredictable economic climate, these predictions are inducing panic, but as with any unknown, it’s important to consider the other side of the story; in this case, what if rates don’t go that high? Amongst the experts, there are three main arguments: 📌 Rates have already risen more than everyone realizes: Many financial and economic commentators focus on short-term interest rates (known as the fed-funds rate), but we’ve already experienced a 2.5 percent increase from a year ago. In the near-term, we may only need another 0.75 percent increase to reach the Fed’s goals. 📌 The Fed is raising rates to slow inflation, and that may have already peaked: The five-year inflation forecast is falling, and additionally, inflation might simply be independent of the Fed. How? The three main factors that led to today’s price increases have little Fed correlation. They include: Loose money from the pandemic, supply chain issues and oil/food shortages stemming from the war in Ukraine. 📌 How much higher interest rates can the U.S. economy handle anyways? According to the Fed, U.S. business debts now sit around $18.5 trillion, which is twice the level before 2008’s financial crisis. Further quantitative easing could put more companies at “zombie” status, but only time will tell how the Fed’s actions play out. Make note: For every argument, there is a counter-argument. Not looking at both sides of the equation could result in poor long-term decision making. |