Things have changed since the Federal Reserve last hiked interest rates in June 2006. Recently, Interest rates have been near record lows for a while, but just like social media changes weekly, that landscape is changing.
Fed Chair Janet Yellen told Congress back in November that a December interest rate hike was a “live possibility” if economic data continued to confirm central bank expectations that the economy will grow “at a pace that’s sufficient to generate further improvement in the labor market, and to return inflation to our 2 percent target.”
If those expectations are correct, investors need to start factoring inflation into their investing strategy.
“Inflation has been dead for so long that I don’t think it’s really on people’s radar yet,” said Andrea Blackwelder, co-founder of Wisdom Wealth Strategies. The Fed may not be very concerned about it right now, she said, “but it may come on quickly.”
That is why investing with inflation in the air requires strategic thinking about the various elements of your portfolio. Bonds and CDs are a classic case in point.
It’s expected long-term U.S. rates to end 2016 in the range of 2.75 percent, hardly a scenario for superstar returns in long-term bonds.
As for commodities, many believe oil prices could become more stable, but his firm remains generally bearish on commodities like the base metals.
Many investors may be learning from scratch how to deal with an inflationary environment this one. Their advisors could be facing inflation for the first time as well so that presents another challenge.