Prices are UP! What do the effects of inflation mean for you and your retirement plan in 2022? We discuss the mandates of the Federal Reserve, what actions they’re taking and what this means for you.

Increasing Interest Rates to Stabilize Prices

Prices are up everywhere from the gas pumps to housing costs to groceries. This is inflation. What does it mean, both in the short-term, for our retirees, as well as for long-term planning. Ultimately, this brings in the question of the Federal Reserve and the comments made by Jerome Powell last week in Jackson Hole, WY. They have two mandates: full employment stability and price stability.

Unemployment rates are at a historical low so now we need price stability. We have high inflation, but this isn’t news to anyone. We’ve been dealing with this all year long. The Feds’ job is to keep price stability and they intend to, but it will hurt a little bit. Fixed income rates of return may not be stellar this year, long-term however, much better. There are some businesses that are affected by this more than others, but it is their job as the Fed to maintain price stability and we expect that includes raising interest rates.

Balancing Interest Rates to Avoid Recession

Price stability and inflation are the same thing. When we talk about the “Fed trying to bring price stability back in and slow down inflation”, they are raising rates. When interest rates are raised it puts the brakes on the economy. The issue is, if they slow it down too much, they’ll put us into a hard recession which isn’t good. They have to find the balance of slowing it down enough to get supply and demand back into balance without a hard landing, meaning pushing us into a recession.

The Short-term and Long-term Effects of the Increased Interest Rates

Short-term, this means that the Fed will attack inflation, in turn, increasing volatility. We have a plan for this. As we build portfolios for retirees, we are able to maintain a consistent stream of income for them, even in a volatile market. There are some question marks still amidst the volatility, but, at SRP, we have a plan that allows you to maintain your standard of living through it all.

Long-term we see some positives out of this. With interest rates rising, in the short-term it hurts, but long-term those higher interest rates allow us to lend money out to bonds and fixed income CDs that pay higher interest rates. If we are lending money out, we actually want higher interest rates. Also, when we look back historically at inflation through the 70s and 80s, we see two asset classes do very well, real-estate and stocks. We are seeing CEOs navigate through a complex couple of years, but in the end, stocks are going to come out well at the end of this.

We are ok with the Fed doing their job, albeit a little bit late. The rising rates will be productive in the long-term.

With any questions reach out to us at SRP, we are here to guide you.