Jan 28

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Interest and Inflation

Today, we’re looking at interest and inflation. Per the Bureau of Labor Statistics, the rate of inflation in the prices of consumer goods and services was roughly 4.5% from December of 1996 to December of 1997. Up until a few months ago, the Federal Reserve was mightily concerned about such inflation. Now, it has set its federal funds rate target at 3.5%.

Interest and Inflation

The Fed publicly stated last week that it expected “inflation to moderate in coming quarters”. Given the extent to which the dollar has sunk in value relative to most major, if not all, global currencies so far this century, in no small part thanks to the Fed itself, one must contemplate just how much this newfound indifference to inflation will continue.

In the near term, the Fed may be able to keep short rates low; however, expect another rate cut this week to be announced after the FOMC meeting. But eventually those rates should start to creep up.

So what does this mean for you? If perhaps you are considering seeking debt financing, between now and June may be the time to lock in a decent rate before the Fed is forced to do the obvious and begin to raise the fed funds target rate to deal with inflation and the continuing weakness in the dollar. But be mindful that we might be headed into an economic slowdown. This means that emergency Fed actions and dead cat bounces in the equity markets can mask no longer.

Interest and Inflation

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