Episode # 255 – What Can You Do to Take Advantage of the Fed’s New Approach to Inflation?

August 28, 2020

Federal Reserve Chairman Jerome Powell made a surprising economic policy announcement this week relating to inflation. On today’s podcast, I discuss details of the announcement and what it means to you and your money. I tell you about strategies you should consider regarding your investments in stocks, bonds, real estate, gold and cash.

Program Length: 31 minutes

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Transcription:
The content shared on your life, your wealth network reflects the views of the host and guests of the program only and are not necessarily the views of Cordasco Financial Network or its advisers. This media production is educational in nature and should not be construed as financial, legal or tax advice or a solicitation or presentation of sale of any financial products or services. Please consult a professional prior to making any financial tax or legal decision.

Welcome to the your life, your well network, helping you find clarity and comfort for your life.

And well, now here’s your host, financial adviser and CEO of Cordasco Financial Network, Steve Cordasco.

Welcome to the Your Life Your Wealth podcast. Happy that you’re a part of today’s program. We’re going to discuss the big news that hit this week with regards to the markets, your money business, the economy and the direction of where we go in our country with regards to interest rates and the economy. The big news is that Fed Chair Jerome Powell announced a major policy shift to average inflation targeting. Yep, we waited all week. On Thursday, Fed Chair Powell announces that the Fed is making a major policy shift, too, and I quote, average inflation targeting. We’re gonna get into what that means in a moment. And what it means to you, your money, what different asset classes like gold and bonds and stocks would impact. This new policy that the Fed has announced on Thursday made a big deal about a big press conference. All the markets were watching as the Fed chair announced the policy shift.

Now, keep in mind, we are the only central bank in the world that has a dual mandate policy, a dual mandate policy of the Fed here in the United States or Central Bank of the United States is full employment and a targeted inflation rate. They would like a two percent inflation rate above that. The path is a little too warm below that. The park is a little too cold. They want their porridge just right. So they’ve always lately they’ve thrown this two percent target out there. It’s been their policy for quite a while, or at least it’s been their talking point. But this was a big shift and this was a change of verbiage coming from the Fed, which was interesting to me. But Fed Chair Powell announced. A major policy shift this week to average inflation targeting, as he said. So what does this mean? It means the central bank will be more inclined to allow inflation to run higher than the standard two percent.

In other words, they’re willing to let the park get too hot.

And accept the fact that they don’t have to cool it off right away. To get it just right. So they’re not going to be as detailed. They are going to give it room to run a bit. The standard two percent rate is something that they’ve had for quite a while.

If you look at the meaning of this from the Fed’s standpoint, and it’s hard if you’re not in the world of money every day to understand why this is significant. The Fed likes to stay preemptive. They don’t want runaway inflation. They try to stay in front of inflation. They also try to stay in front of deflation because it can go the other way during my lifetime. Most Fed chairs and those that are on committees have been very preemptive in how they guide themselves. They’re continually trying to see what data shows of what’s around the corner.

And in this particular case, what I took out of the language and what they wanted us to take out language. Because when you finally ask them to explain what the heck they’re talking about with their eight, nine syllable words, it boils down to this. They’re going to allow the economy to run a bit.

They are worried more about deflation and the lack of inflation in the system than they are of allowing inflation to get away from them. See, you go back to World War Two.

Inflation was a poison pill in Europe when we were able to study history in this country or I go back to my history class with a beloved guru, Mr. Norton, who is my 10th grade history teacher. I still remember the image of a wheelbarrow filled with Marx paying for a loaf of bread and that being the catalyst for political change in our country. That same image in history class was a basket of apples being sold one by one by a businessman in a fedora and a suit on a street corner in New York. His family thought he was going off to Wall Street or to his real estate career, and he was walking down to the corner peddling apples huckstering to try to make a living. It was about employment in our country. That’s why our Fed has a dual mandate. That’s why this is important. They justify their existence at the Fed based on what the employment environment’s like in our country and what the inflation rate is like, price stability, because if prices get out of control, you get civil unrest. If there’s no jobs and people don’t have work. You have the same thing, civil unrest, if the numbers get too high. So the Fed is instrumental in trying to keep things just right. And the Fed is usually wrong. And it’s easy to see how long they are because they’re always trying to be. Preemptive. They’re fearful of the days when Jimmy Carter was in office and we had runaway inflation. Hyper inflation, as it was called at the time. Paul Volcker was this Fed chairman at the time that came in and drove interest rates all the way up. Mortgage rates went to 15, 16 percent. There were money market accounts like that Delaware cash reserve that were paying north of 12 percent. Treasuries were in double digits. Paul Volcker broke the back of inflation by basically making money so expensive that it corrected the system. What we have right now, what you need to pay attention to, because this means something to your wallet, is this Fed chair Jerome Powell. Is the complete opposite. He has to do the opposite of Paul Volcker. This is what he’s saying. He’s saying we have a major problem in this country, that we can’t get pricing power. Therefore, a larger group of people are making a lot more money than others who might be down the socioeconomic scale because much of their employment raises aren’t built around the same functions and formulas. That’s somebody who might be in more skilled work and therefore they don’t get increases like others do, right or wrong. I’m not here to tell you. I mean, we can do a political show, but I’m just telling you how this is how this thing works. And right now, this Fed chair, Jerome Powell, is extremely worried. If I take the messaging that he’s given that cozied has weakened our economy. To the point where we have to drive interest rates as low as they can go. To help keep the economy going, make money cheap. He’s trying to do the opposite of what Paul Volcker did when there were too many dollars chasing too few goods. He wants more dollars chasing goods and services that will drive some inflation into the system. And I know it’s counterintuitive, you say. Who would want higher prices? But he’s not looking for runaway inflation. He’s looking for that two percent number and we’re not near it. So in addition to the inflation rate, the Fed shifted its approach to employment in a way that will focus on those at the lower end of the income spectrum. So you wonder, Chief, how can they get that targeted with this? Well, the Fed has this obviously long running battle with inflation. So let me clarify. The Fed’s been battling for some inflation for many of years now, and they’re not getting it. So they made their point on the inflation side. And I thought what they ended up doing with the employment numbers was interesting. They came out and basically said, here’s how we’re going to address our analysis of employment. They will base assessments of the shortfalls of employment from its maximum level. Let me say that one more time. They will make assessments of the shortfalls of employment from the maximum level. Here’s their prior language. Prior language referred to deviations from the maximum level. OK. So we now have to try to figure out what they’re saying. Here’s my take on this. And it’s interesting in the way I think they’re looking at it. Take, for example, today’s economy tried to get a haircut. Still takes three weeks. So I asked, why does it take three weeks? Are we still under Cauvin at home? No, we can’t get people to come to work. So there is a shortfall because receptionists don’t come in. Maybe the shampoo’s aren’t in. Maybe those that cut don’t come in. Same in the construction space when people are getting paid more to stay home. Should they be counted as the unemployment rate, meaning unemployment? To me means you can’t find a job. But the jobs are there and people may not elect to want to take the job. But the Fed would look at inflation through the lens of employment sometimes to say, wow, that’s a strong labor market. More people be making money. There’s businesses are going to have to give raises because they need people to come to work or they’re trying to attract somebody from across the way. Bottom line is, there’s not enough workers for the amount of business being done. But does this now mean that the workers are out there, they just choose not to work, therefore, that’s not very inflationary. It’s interesting. We got to get to the root of that language. But let’s talk about this from the direction of what the new Fed policy, their new way of going about measuring their mandates, what it means to you, your money and what happens next. Question is, will some advisors shift the recommendations of where to invest? Will they be shifting strategy? I’ll tell you what I’m planning on doing. The Fed’s timing was interesting.

This should have came out later. Closer to October.

Usually some conference that they all 10 and they make announcements. This is a surprise announcement. So it’s interesting. What’s the reaction to the markets? Stock market. Bond market. I want to talk about that. What’s it mean to you when your money. We are going to have lower short term rates for a longer period of time. The Fed came out and said, we’re not even thinking about. Thinking about. Raising rates. Think of let me say it again. We’re not even thinking about, thinking about. So they’re not even thinking that they need to think about it. That’s how far away they are from hiking interest rates. I don’t if he could have gotten a stronger message that rates are going to be low for a long time. And if you start to see inflation numbers spike up, don’t be so quick to think the Fed’s going to raise rates. It’s basically saying we’re going to let it run a little bit. That’s going to be challenging to markets. It’s going to create volatility. Let me put it to you this way. Here’s what’s going on. You’re driving down the Atlantic City Expressway and the sign says Speed limit 65. But there has been a message given by the governor and the governor says 75 at 75 is the new speed limit that we will write tickets, even though the sign says 65, 65 is the law. But the governor directs the police not to give you a ticket unless you’re going over 75. So they’re allowing the rule to be broken. They’re giving a certain amount of leeway. You can do 75 and not have to worry about getting a ticket. This was a message to the markets. So what does lower interest rates for a longer period of time mean to you and your money? Let’s start with stocks. I’m gonna go through stocks, I’m gonna go through real estate. I’m gonna go through bonds. I’m gonna go through gold. I’m gonna go through cash stocks and increase. Feds basically saying we’re keeping rates low. That’s usually fuel for the market. Cheaper money, businesses can expand. Businesses can invest. They have to get a lower return because they’re borrowing at lower rates. It’s usually good for private. And publicly traded companies, real estate. We’re already seeing it, a low interest rate environment. You got a boom there. You actually have inflation going on in the real estate market. We might have some inflation in the stock market, but it’s not as obvious as the real estate market. So there’s inflation there.

Real estate’s usually the largest component in the calculation for inflation for the Federal Reserve. Something to keep an eye on. So in the stock market, where’s money going to be going? Which direction? Well, obviously, you want a diversified portfolio, but usually in an environment like this where the Fed has come out and basically says we are going to drive some inflation, we want this economy to expand. We’re keeping rates low. We’re not even thinking about thinking about raising rates. Get comfortable with this. Don’t get alarmed. If we get a pop in numbers here or there that show there’s some inflation and you start thinking that we’re thinking about raising rates because we’re not thinking about thinking about raising rates. It’s what they’re saying.

So when the stock market usually value type stocks do better, doesn’t mean they will. But if we’re coming out of a slowdown in an economy that the Fed is basically saying they’re worried about that and they want to keep fueling it. Usually value stocks and what our value stocks their stocks at. From a valuation standpoint, the calculation shows what the company’s worth and sometimes value is in favor. Sometimes growth is in favor of value. Stocks and growth stocks compete against each other for shareholders wallet. Most of it comes down to where somebody is looking to make a bet on which one’s going to do better.

And a diversified portfolio should have both. But in this type of environment, you could probably anticipate that there’s a chance that your value stocks, those that pay dividends, those that tend to be companies that are more cash flow positive. There’s a good chance you’ll see a little bit of boost in here. Can’t say it’s going to happen, but could be bonds. How will bonds handle low interest rates for a longer period of time? I expect volatility. I expect the bond market in this type of environment. We’ll get nervous. Now, the bond market, smart, probably smarter than me. I know what the Fed was doing, the Fed was talking to the bond market, not the stock market. That’s their big fear. Bonds are very important to the Fed. They play in that arena. Here’s the thing with bonds. Higher interest rates. Interest rates moving up are kryptonite to bonds. It’s a disaster. So for the last three years, whenever you hear that advisors or your advisors say get out of bonds are going nowhere. Here we are in the third year of that song. And if he got out of your bonds, you’re probably not happy about it. Bonds have held up well, and in this environment, they’re probably going to still hold up well. But. It could at any time the bond market could get very spooked by an inflation number that comes into play.

Maybe it’s a quarterly number that looks alarming to the bond market, like, oh my gosh. How’s the Fed going to deal with this number? Are they going to have to start thinking about thinking about raising rates? It might come to that. And the Fed may not say anything. Hey, genius’s member, the end of August. I’m Jerome Powell. I told you what to expect. So maybe you get a second quarter or a third quarter of an alarming number. At what point do we know whether the Fed is thinking about thinking about raising rates? It’s going to make for a volatile bond market. In my opinion, I don’t think the bond market is going to trust. Jerome Powell is going to come out for months in advance and let everybody know we are now thinking about thinking about raising rates. Maybe, well, maybe he’s different this time. So something to watch. Gold. So if there’s no inflation in the system and basically the Fed came out this week and said we’re throwing more at the lack of inflation. See, there’s three types of verbiage we can use. We can use inflation. We can use deflation. So inflation is prices going up year over year. Deflation is prices going down year over year. Then there’s a third term you need to know, disinflation, disinflation.

Are prices going up less year over year? So prices went up last year, two percent. They go up this year, one percent. You still have one percent inflation, but that’s called disinflation. The Fed is worried about this slow progression down the escalator of prices.

And this disinflation that has almost gone to zero, which means deflation and deflation to many of those who are economists and study this stuff. And as one of my professors at Temple University told me.

Deflation is something you don’t want to see. It is hard to fight. It is hard to go after and it makes inflation. Look like Romper Room. Were Paul Volcker raised rates? See, deflation is a problem because governments bring in less than tax dollars. Because the price of goods and services aren’t increasing. An increase in the price of a good or service if there’s a six percent tax on the sale price is a boost to revenue.

So gold. Gold should be falling right on the news of the Fed fighting for some inflation, hoping to get some inflation, basically saying we lack inflation.

And we’re worried about it. So what gives here? Well, low interest rates to the point of zero or negative. Is pushing up gold, in my opinion. Why gold pays no interest. As Warren Buffett once said, what good is gold? You put it in your pocket, it’s heavy and it doesn’t pay a dividend, doesn’t pay any interest. You got to hope it either goes up or you don’t sell when it goes down.

And it’s heavy. It doesn’t go in a statement. That’s Warren Buffett. He’s right. Gold pays no interest. The trade off as a storage of money makes gold more attractive to cash sensitive investors. Why? We’ll think about it if you put your money in the bank in cash. A savings account or a money market account, whatever you want to put it in to store it. What are you getting today? Almost nothing. Because the Fed told you, we’re not even thinking about thinking about raising rates. So they’re keeping rates lower, as low as they can go to try to get some inflation.

They want more money into the system. Therefore, if your money sitting in a savings account, they don’t want it earning anything. They want you to go use it. Well, if you’re not going to get paid anything to be in cash in a bank, some investor said rather own gold because even during deflation times, gold tends to hold its value. It’s interesting. It’s hard intuitively, right? Because you think of a seesaw, one goes up, one goes down. But it’s almost like reading between the lines. That’s why investing on your own is so difficult unless you’re in it everyday, living it, breathing it, reading reports and looking at it and hearing what people say and trying to really understand what they’re really saying between the lines. There’s a lot to understand between lines when it comes to putting your money to work for you. Having a diversified investment portfolio and then knowing how your money is going to play and behave in the environment that your money is dealt. Some of you listening right now were in an environment back in the late 70s and early 80s where you felt the effects of inflation. Maybe you had that first mortgage on a house or a second home when you were just upgrading. And here you are paying almost well into the double digits on an interest rate on your mortgage. And then here you are today debating because you’re now in your 60s, 50s, 70s, agonizing over whether or not you go against your principles of not wanting debt in your later years, your senior years of living. And maybe you’re thinking about buying a vacation home or making a change to your living environment. And now getting a mortgage might be counterintuitive. Money operates differently at different points of time, depending on the environment. And we haven’t had a Federal Reserve so far in my lifetime and yours that hasn’t been thinking about thinking about raising rates. It’s always been about when the raising rates. So it was a watershed moment for me this week to hear the Fed speak, because it allows me to go back and say, what are my strategy plays going to be for those that I’m navigating today’s money through? Where do I want to be and what do I need to watch for?

Because this is sort of like them saying, you know what? The playing fields, the playing field, if we revert to to sports, the playing fields, the playing field, the measurements are all the same.

But we’re calling the game different and the teams that can adapt to the referees changing, whether they swallow their whistle or are alarmists throughout the whole. Time period.

Alarmists that they want to just be in the way of everything. That’s what we’re dealing with here. And what the referees are saying is that expect low rates expected for a long time if we get a pop here, in there. And what inflation numbers look like. Take it for whatever you think it is. But we’re not even thinking about thinking about raising rates.

It’s going to mean a lot, even for those that might not have large assets that go into stock markets and bond markets and things like that. It’s going to matter. This very low interest rate for a long time. That’s really what the Fed was saying. Low interest rates for a longer time get used to it.

It’s going to mean lower interest payments on your credit cards. So many credit cards will be in that single digit range for for some of you and for those that have maybe got themselves in trouble with some credit card stuff in the past and you’re used to pain in the 20 percent range, you’re still going to be low. So these short term rates that the Fed is going to start manipulating and playing with to try to get inflation to start moving again. Look for credit card rates to spiral down even more than what you’re seeing. Shop around. Back in the day when rates were high. People used to shop for c.D, a call bank after bank after bank. Now money is cheap. Call around credit cards. You could find a six, seven, eight, nine percent difference in cards today. Home equity line of credits, extremely low rates, student loans, student loans are pegged to lie bore or a set rate. That rate plays off of the rate that central banks Hegg. All interest rates off of. So student loans will be less expensive for the younger generation. Some of you may, based on your credit, sometimes you have to look and say. Would it be better to borrow for my education than use my own money? Is the return on investment going to be there? I don’t know. I can’t give you the answer that it takes. It takes, you know, a pushing of a pencil, which I love to do, could definitely help people with that. But it’s definitely a different way of thinking now. Got to remember, the Fed’s thinking different. They’re not even thinking about thinking about raising rates.

They’ve never done that before. So.

We have to think different in the strategies that we use. Are you ready for this one? Mortgage rates are rock bottom. Somebody the other day tells me that they can. Two point four on a 10 year fixed. That can go to just with that.

Mike, why would you do that? Well, look how low the rate is.

Well, don’t mess with it, because when the feds usually wrong, by the way, just let everybody know. Don’t mess this up. I’m not sure when. That’s just it. It’s like when will the music end? And musical chairs, you don’t know.

But when you least expect it, inflation will be there.

And what the Fed is telling you is we’re not even close to being there. Are they right, are they wrong? I don’t know. We have to play the cards were dealt with at the time. So I would say if you’re getting a mortgage. Lock it in for the longest period you can, because if rates really go a lot lower. If that three percent, 30 year fixed on a jumbo goes to to go reify, you have that option. But if the three percent goes to five, you’re loving it. You bought that summer house that all the grandkids can come to where you did he lock you put a pool in or you decided to sell the property. You have to move to a place that’s more conducive for working from home and sharing special times with family. That’s what’s going on there. This paradigm shift that we were talking about. A few episodes ago with regards to everybody wanting to buy a second home or a vacation home or changing the home that they’re in based on.

Covered 19. We were wondering if it’s a fad or a paradigm shift. I’m now in the paradigm shift camp. And if you’re going that direction and you’re thinking about making a real estate deal, I would tell you seriously consider whether you want to borrow money or not. The numbers are very favorable and your options are favorable. Rates keep dropping. You can always go back to the table and renegotiate your loan. Rates go up. The bank offers you the same opportunity, sit at the table, renegotiate the loan with you. But you’re not going to do that. You’re not going to go from three to five. Guess what, you might do it.

You might do it when all of a sudden the interest rate or the return you’re getting on your money, stocks or bonds or whatever it might be. Are less than three percent might be paying that off. Again, this is a new mindset. You have to know your strategies. You have to listen to what the Fed saying. It doesn’t mean they’re right, but it means this is how they’re calling the game for a little bit. And me as a coach or somebody who has to guide, you have to be able to adjust to it.

Bottom line, the Fed is saying we want more borrowers. We wanted to make a cheap for you. We want you to go out. We want you to spend the money. Look for stocks to continue some strength. Gold will continue based on the civil stuff that’s going on, the unrest, as well as the fear of deflation. It’s something there. I’m not saying go out and gobble up gold. But as I’ve always said, nothing wrong with having a little bit of gold. You don’t need it in your diversified portfolio. Go buy some coins or whatever the tangible will do. If you’re good enough to strategizing and buy some miners and some of the companies that have paper behind them through stocks or certain creative debt, real estate, I’d be careful of Rietz in the commercial real estate space. There’s inflation out there and real estate. Homes are being gobbled up. You got to remember, too, you have a huge population boom going on, younger millennials coming through the system. They’re bigger than the baby boom generation and they’re getting very close to going into home demand. So pay attention to that. Value stocks. I always seem to like if you’d like to talk about your situation or review how your portfolio fits into the new strategy by the Fed, more than happy to talk about that. I really appreciate your time. Hopefully you found this to be educational. Listening to the Fed is very difficult. They speak in terms that are almost among themselves or a bunch of elites that went to Ivy League business schools. We try to break it down as best we can. But if you want to have a particular conversation about more than happy to talk to you, please reach out to me. Ask Steve at CNN Plan dot com if you’d like any guidance on what you’re doing right now in your strategy. Many of you listening right now. We already help. So this is already baked into the cake. But for many of you who listen to us, who need some guidance, need some help, feel free to reach out.

Ask Steve and see if and plan dot com or you can reach me at two one five five, six, nine, one, two, three, four. Thank you so much for being part of your life, your wealth podcast with me, Steve Cordasco. Have a great week and I’ll be back next week to talk more about your money and your life.

Have a safe and healthy week. If you’re interested in learning more about applying the principles we discussed to your personal financial circumstances, please visit Cordasco Financial Network at cfnplan.com.