Most recently, you may have read that Federal Reserve Chair Jerome Powell announced a change in how the Fed views inflation. In the past, the Fed said it would consider adjusting bond market short-term rates when inflation approached 2 percent. But in light of 2020’s many challenges, the Fed’s new policy may allow inflation to run above 2 percent for a period of time before any shift in monetary policy is considered.1
For many, bonds are a critical component of their overall investment strategy. So any change in Fed policy regarding inflation may influence a portfolio. That’s why it’s so important to understand that the market value of a bond will fluctuate with changes in interest rates. In other words, when interest rates rise, the value of existing bonds will typically fall.2
There’s no doubt this will be a subtle change for many. But for bond investors, the policy shift may indicate that the Fed has given itself more flexibility in the future.
But, what does that mean for the outlook for the bond market as a whole? It’s unclear. However, lower levels of unemployment in recent years have not led to higher inflation. This new phenomenon runs counter to the Phillips curve, a concept which states that inflation and unemployment have a stable and inverse relationship. With this data in mind and the changes announced by Chairman Powell, it could be argued that the Fed believes the relationship between unemployment and inflation has changed.3
In earlier videos, financial advisor Ed Doughty mentions the relationship between the Fed and the economy, as well as elaborates on the age-old expression “Don’t Fight the Fed”.
Keep in mind that if an investor sells a bond before maturity, it may be worth more or less than the initial purchase price. By holding a bond to maturity, an investor will receive the interest payments due plus your original principal, barring default by the issuer. Investments seeking to achieve higher yields also involve a higher degree of risk.
Recently, you may have seen reports that a record-low number of homes are available for sale—roughly 1.03 million nationwide. If you compare that to the average number of homes for sale during the past 10 years, it’s no surprise that many hopeful homebuyers are having issues securing a home. But why exactly is the housing … Continue reading “Forces Driving the Housing Market”
It can be exhausting trying to keep up with the whims of Wall Street. Lately, the financial markets have been fixated on federal taxes and what may be proposed on Capitol Hill in the weeks and months ahead. Wall Street’s focus on taxes closely follows its attention on the 10-year Treasury yield. And it wasn’t … Continue reading “The Whims of Wall Street”
President Joe Biden introduced the much-anticipated American Jobs Plan, which outlines an approach to spend roughly $2.2 trillion on the nation’s infrastructure and other projects. As part of the legislative process, the Biden administration also laid out a proposal for paying for the domestic investment. The plan includes raising the corporate tax rate to 28% … Continue reading “Paying for the Infrastructure Bill”
Financially, many of us associate the spring with taxes – but we should also associate December with important IRA deadlines. This year, like 2020, will see a few changes and distinctions. December 31, 2021, is the deadline to take your Required Minimum Distribution (RMD) from certain individual retirement accounts.
There’s an old Wall Street maxim that says, “markets climb a wall of worry.” And these days, there’s plenty to worry about with the trend in long-term interest rates and bonds.
Epic Capital provides the following comprehensive financial planning and investment management services: Learn More >