Sorry to all you New England Patriot haters, today we’re talking about the Federal Reserve’s (“The Fed”) annual conference which was held virtually this week. Chairman of The Fed, Jerome Powell, spoke on their intentions of leaving interest rates low for a number of years in an attempt to keep the economy from deteriorating further from today’s Covid ridden levels. In order to assist in this they want inflation. They want prices to rise, not fall. Their goal is 2% inflation, but they have stated they would let prices rise higher to help reach an average rate of 2%. Equipped with this new information, here are some potential points to help us set our expectations:
- Let’s get comfortable with earning .8% in our online savings accounts and basically .00% on our bank checking and savings accounts. Even when rates were rising a couple years ago, interest rates on most bank accounts did not follow suit. We are going to be starting from EVEN LOWER rates, so let’s just assume there is no 1099-INT coming at tax time from your money maker account.
- Let’s get comfortable with some distortion. Low interest rates can have the unintended consequence of creating “bubbles.” These bubbles do not always pop to cause devastation like the housing market in 2008, but they can distort what could have been. Is a bubble forming in US tech companies with Apple (AAPL) valued over 2 trillion, Amazon at 1.7 trillion and Jeff Bezos himself now worth over 200 billion?? Are bubbles already forming around sectors like home exercise equipment and fitness? Are bubbles popping in commercial real estate as less square footage is demanded?
- Let’s get comfortable with uncertainty. The economy is not a combination lock. The Fed does not know the exact combination needed to unlock this 2% inflation average they have set. If anything, they have 2 of the 3 numbers to the combo and are eagerly telling everyone to “shush” while they have their ear up against the lock hoping to discover the 3rd.
In order to head into the weekend on a less gloomy note, let’s talk about opportunity. Uncertainty, distortion and low rates are all going to create opportunities. Some will involve too much risk and are worth passing on, while others may be ripe for the picking. It’s my job, our job, to keep an open mind and a watchful eye so we can identify the opportunities worth taking.
Happy Friday! Be healthy and please stay safe!