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These Assets Could Be Attractive If Fed Rethinks Inflation Course


Mar. 19 2019, Updated 3:18 p.m. ET

Fed’s inflation target

The Federal Reserve’s two main objectives are stabilizing prices and maximizing employment. The Fed’s inflation target has been 2% for a long time. Inflation, however, has been undershooting this target for a while. As reported by Bloomberg, the Fed’s vice chair, Richard Clarida, said that the Fed could now review its twin objectives. While it will not change its inflation target, Clarida mentioned that the Fed might consider introducing a strategy that could make up for periods of below-target inflation with periods of above-target price rises.

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Goldman Sachs on Fed’s inflation target

As reported by CNBC, Goldman Sachs also believes that the Fed could let inflation run above its 2% target. This, it believes, could take the rate hike off the table. The Fed increases rates in a bid to tame inflation, but if it could tolerate a higher inflation figure, it could also do without a rate hike when the labor market is firm.

According to GS’s equity strategist, Ben Snider, “Our economists believe it is leaning toward adopting an average inflation targeting approach. If implemented, they believe this change would decrease the likelihood of further near-term policy tightening and lead to a small and gradual increase in both expected and realized price inflation.”

Goldman also stated that slightly higher inflation would be positive for stock (DIA) (IVV) valuations.

JP Morgan on the Fed and inflation

As reported by Bloomberg, J.P. Morgan (JPM), on the other hand, considers TIPS (Treasury inflation-protected securities) (TIP) and gold (GLD) as the best choices as a refuge from rising prices. JPM strategist John Norman said, “TIPS and gold seem like the most durable inflation hedges for a unique macro environment when the Fed’s reaction function isn’t the only regime change impacting real assets.”

JPM also likes gold (NUGT) (IAU), as the Fed could depress real yields to spur the economy (SPY) (VTI), undermining the dollar (UUP) (USDU).


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