The Fed will allow higher inflation

[Aseahawkfan]

The Fed plans to shift to average inflation rather than a target of 2% consistently. This means they plan to allow much larger increases in inflation as along as the average is roughly 2%.

What does this mean?
1. Prices should rise across the board.

2. Saved money will lose value faster. This means if you aren't investing in assets like stocks and property that increase with inflation, you will be losing money at a faster rate.

3. Wages may stagnate or be devalued faster unless constantly adjusted up for inflation. Not sure how fast social security adjusts for inflation, but this could be impacted.

4. People who lack money to invest in assets will not benefit much aka the poor. The Middle Class should see an increase in owned property and stock assets, while occasional lags in buying power of wages. Those with money to buy assets that will benefit from inflation will benefit greatly aka The Rich.

We are in a very strange place right now. The Fed and government is engaged in an economic damage delay game. They have not allowed the economic damage from the shutdown to fully hit the economy. And the damage is terrible. 2nd quarter GDP shrunk 34.3 percent and unemployment exceeded 20%. Worst second quarter in documented history. Now things are reopening and we can expect a fairly strong rebound. Yet the stock market is trading at all time highs based on government stimulus and The Fed's easy money policy. We have been flooding the economy with money. This should cause currency deflation, which will further erode purchasing power and lead to inflation as more dollars chase goods and services. This will occur while we are unsure of the full economic damage from the pandemic.

I feel at this point not investing is detrimental to my cash pool. I'm thinking the best thing is to buy into some undervalued assets paying a 3% or so dividend which is currently ahead of inflation as well as growth stocks of companies with products growing at a faster rate than the inflation rate. At the same time keeping a strong cash position is important because at some point the economic damage has to hit the economy likely causing a pullback making stock prices more attractive. Tech seems over-valued at the moment and not sure there are many good picks there given the valuations are so high. But cyclicals and banks look more attractive, though their loan books will be damaged if inflation is too high.

Tough time to invest safely. Great time for traders with a high appetite for risk.

[RiverDog]

Good analysis. I graduated from college in 1978 and cut my teeth when inflation was 12-13% so 2% is a little difficult for me to get excited about, but I hear what you're saying.

Like I think I mentioned to you, I have most of my money tied up in IRA's and have hired an investment counselor that I have a high degree of respect for to manage it.

[Aseahawkfan]

I do not like that everyone has to go into equities and property for any decent return and to protect their savings. This new policy will exacerbate the wealth gap immensely. It's going to encourage more socialist policy in the United States at this rate. How are working people going to do with rising prices and stagnating wages? We shall see.