Fed wants inflation

[vtMaps]

In the headlines today:
"The Federal Reserve pledged to focus on low
unemployment and tolerate higher inflation, a
major change that could keep interest rates low."

I have heard it said that one cannot (or should not) fight the fed. How is this actionable? Should one be buying TIPS? They seem expensive now.

--vtMaps

[IndexCore]

From listening to the speech, an an expert at CNBC giving his view, I think there's two changes to how the Fed approaches inflation:
(1) previously the Fed believed reaching full employment triggered inflation. The Fed is dropping that, and is now only concerned about drops in employment (not increases).
(2) since the Fed has missed it's 2% inflation target for a long time, when inflation does come back, the Fed wants to allow inflation to go over 2% long enough to balance out inflation. A "flexible" average inflation target.

[vtMaps]

Is there anything they can do to actually increase inflation? --vtMaps

[7eight9]

So the Fed wants inflation. I think Mick Jagger said it best --- https://www.youtube.com/watch?v=jv9sDn_2XkI

The Bank of Japan has had difficulty with its inflation target for a long time --- https://www.federalreserve.gov/econres/ ... 200108.htm

[milktoast]

"previously the Fed believed reaching full employment triggered inflation"

Wage growth is the trigger for inflation. Previously the Fed believed reaching full employment would trigger wage growth.

The Fed does not have the tools to cause wage growth in line with productivity increases. But until that happens, we will see this odd situation with very low inflation, very low interest rates, and very high asset prices.

[Leif]

I've noticed my TIPS funds (I have short and intermediate term TIPS funds) have been doing good recently, relative to my other bond funds. Perhaps anticipation of this announcement is the reason.

[Robot Monster]

Is there anything they can do to actually increase inflation? --vtMaps

The Chief Fixed Income Strategist at Schwab has questioned this. Two of her Twitter posts:

22 hours ago
#Fed Chair #Powell will likely talk about targeting higher average #inflation but it’s not clear how it can be done.
https://twitter.com/KathyJones/status/1 ... 22784?s=19

One hour ago
Two questions from Powell's speech: How will the Fed push inflation to 2% and what will it do if inflation expectations rise so much that the long end is unanchored? No real answer to the first and the second is a risk the Fed seems willing to run.
https://twitter.com/KathyJones/status/1 ... 56290?s=19

[Kenkat]

What the Fed said: We want inflation!
What they really meant: Deflation terrifies us!

[Leif]

I have heard it said that one cannot (or should not) fight the fed. How is this actionable? Should one be buying TIPS? They seem expensive now.

--vtMaps

Expensive relative to what? Isn't everything expensive now? I look at the cost relative to nominal bonds, with a price based on a very low future anticipated inflation rate, and I think they are cheap. But, I'm retired, so I'm more focused on inflation then some others. IMO, low cost insurance.

[FIREchief]

Should one be buying TIPS? They seem expensive now.

TIPS are no more "expensive" than nominal US treasuries right now. If you want 100% safety, you pay a (small) price.

I'm already at 100% TIPS for my fixed income, so nothing for me to consider. I have no idea if inflation will increase or not. That's the beauty of TIPS, I don't care....

[prairieman]

What the Fed said: We want inflation!
What they really meant: Deflation terrifies us!

Exactly what I was thinking.

[texasfight]

Translation - "Sorry Gen Z - you missed the boat on owning assets. Better hope you are a getting an inheritance or are going to make over $250k/yr or you are sunk."

But don't worry you also won't get your social security benefits you paid in for 30 years when you retire so there's that.

[montanagirl]

The central banks always aim for 2% inflation. Deflation is the enemy.

But it's been really difficult for some reason. Like the world's economy is really stagnating, no matter what the central banks do to goose it.

[Robot Monster]

The central banks always aim for 2% inflation. Deflation is the enemy.

But it's been really difficult for some reason. Like the world's economy is really stagnating, no matter what the central banks do to goose it.

Yep, getting it to 2% is quite the struggle. Well worth checking out the chart in this link,
https://twitter.com/KathyJones/status/1 ... 22784?s=19

[Impatience]

They always wanted inflation. They are just stating that desire in very slightly incrementally more aggressive terms. A whole lot of fuss over nothing.

[Alaric]

They always wanted inflation. They are just stating that desire in very slightly incrementally more aggressive terms. A whole lot of fuss over nothing.

This. Basically all they've said is they want a steady 2%, so if inflation is flat one year, they will put up with 3% annual for the next two years rather than try to manage those years to 2% annual inflation.

[flyingaway]

Is there anything they can do to actually increase inflation? --vtMaps

I guess that printing more money will just do that.

[RomeoMustDie]

It's tough to say.

Commodity prices seem to have peaked.

If we have a sell off long term bonds might be the asset class to hold now that we have assurances that rates will remain low.

Another option is dividend value stocks as a temporary store of value, but I'm not convinced that these can't go lower short term.

[Ged]

Is there anything they can do to actually increase inflation? --vtMaps

Nobody knows nuthin'

[Random Poster]

They always wanted inflation. They are just stating that desire in very slightly incrementally more aggressive terms. A whole lot of fuss over nothing.

This. Basically all they've said is they want a steady 2%, so if inflation is flat one year, they will put up with 3% annual for the next two years rather than try to manage those years to 2% annual inflation.

If higher inflation is “painful,” and lower inflation is beneficial, I’m not sure that I buy the idea that one should suffer more later because they had good times earlier.

[rich126]

Everything useful I've read says that fighting deflation is very difficult and not something you can easily win so I think everyone would prefer consistent inflation whether it is 1,2,3% or a touch more. When you have a scenario (deflation) that rewards you by not spending your money, then that is terrible for the economy. If I know that products get cheaper the longer I wait, there is no incentive to buy anything now unless I absolutely need it.

And of course the government doesn't want high inflation since that would make the debt payments too high thus wanting a 2-4% inflation range.

[balbrec2]

So the Fed wants inflation. I think Mick Jagger said it best --- https://www.youtube.com/watch?v=jv9sDn_2XkI

The Bank of Japan has had difficulty with its inflation target for a long time --- https://www.federalreserve.gov/econres/ ... 200108.htm

pushing on a string, comes to mind

[PicassoSparks]

If higher inflation is “painful,” and lower inflation is beneficial, I’m not sure that I buy the idea that one should suffer more later because they had good times earlier.

If the Fed only acts to bring inflation down when it is above 2% and does nothing when it drifts low, then they are sending a signal that they aren't really targeting 2% inflation, they are targeting some number under 2%. So then people and institutions would rightly start making plans based on an expectation of sub 2% inflation, making a mockery of their stated goal and likely triggering a feedback effect of lower and lower effective inflation targets. Which means they don't have as many tools to stimulate the economy when it begins to slow (they are not willing to go to negative nominal interest rates).

So by signaling that they would be willing to let inflation drift above 2% for awhile so long as it was on average 2%, they give the market the predictability that a steady Fed is meant to give us.

[ray.james]

What the Fed said: We want inflation!
What they really meant: Deflation terrifies us!

Exactly what I was thinking.

+1. Fed is really trying to steer away from any such possibility and hopefully warm up the economy. Powell tried not to use the D word

[FIREchief]

And of course the government doesn't want high inflation since that would make the debt payments too high thus wanting a 2-4% inflation range.

I thought it was the exact opposite.

[EddyB]

Translation - "Sorry Gen Z - you missed the boat on owning assets. Better hope you are a getting an inheritance or are going to make over $250k/yr or you are sunk."

But don't worry you also won't get your social security benefits you paid in for 30 years when you retire so there's that.

Based on what I see here, I thought everyone in Gen Z was retiring at 34.

[hyperon]

And of course the government doesn't want high inflation since that would make the debt payments too high thus wanting a 2-4% inflation range.

I thought it was the exact opposite.

Agree. The debt doesn't inflate, so inflation is beneficial for paying down the debt.

[bikechuck]

Should one be buying TIPS? They seem expensive now.

TIPS are no more "expensive" than nominal US treasuries right now. If you want 100% safety, you pay a (small) price.

I'm already at 100% TIPS for my fixed income, so nothing for me to consider. I have no idea if inflation will increase or not. That's the beauty of TIPS, I don't care....

Do you have individual TIPS or a TIPS fund?

[Leesbro63]

Didn’t Richard Nixon implement wage and price controls because inflation had “skyrocketed” to 3%, in 1970?

[vitaflo]

Translation - "Sorry Gen Z - you missed the boat on owning assets. Better hope you are a getting an inheritance or are going to make over $250k/yr or you are sunk."

But don't worry you also won't get your social security benefits you paid in for 30 years when you retire so there's that.

Based on what I see here, I thought everyone in Gen Z was retiring at 34.

Given Gen Z is barely old enough to even have a job, I'm not sure any of them are thinking about retirement soon. They still need to finish high school.

[LadyGeek]

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