Inflation and Interest Rates:

Full Transcript:

I can finally buy a dozen eggs without needing to take out a second mortgage. And that’s a good thing, too, considering these rates.

There’s been a lot of excitement around inflation, the economy, and interest rates over the past couple of years. And for good reason. Let’s step back and look at what happened throughout the pandemic and then talk about what that means for you going forward.

In 2019, both inflation and interest rates were running about 2%. Then when the pandemic hit, the economy shut down and unemployment shot up. At that point, the  Fed dropped interest rates to 0% to try to stimulate the economy. Inflation dropped a little bit at the beginning of the pandemic, but then when the economy reopened, inflation came back with a vengeance. It started increasing drastically in 2021 and then hit a peak last year of just under 9%.

In response to that, the Fed started increasing rates last year. A little bit behind inflation. They drastically increased rates to try to tame inflation, and it seems to be working, as they’ve got rates up to 5%, and inflation is also back down to 5%. However, they still have a long way to go on inflation to reach their long-term target of 2%. Now, nobody knows exactly what’s going to happen next, but the markets are trying to predict that.

However, let’s talk about what that means for you. First, with interest rates being as high as they are, you really want to minimize taking on any new debt. With the Fed funds rate at 5%, you’re likely taking out a mortgage and other loans at 6%, 7%, or higher. At these rates, it gets increasingly harder to get a better return in the market than it costs for that debt.

Next, make sure that you are managing your cash appropriately. I talked about this a bit in my last video. Making sure that your emergency fund is in a high-yield savings account, getting 4+ percent as opposed to 0.2 percent.

And lastly, make sure that you are maintaining a diversified portfolio that is set for your needs and your goals. With the market’s been forward-looking, people are predicting what is going to happen, and that is already priced in. Bonds look more attractive today than they have historically, but stocks are still going to be your primary growth engine. Make sure you have a portfolio that meets your needs to give you the best chance at reaching your goals.