the fed recently announced that it would
allow inflation to run above 2%
for some periods of time shifting
towards an average inflation target what
does this mean
this means that the fed is allowing
higher inflation so in today's video
i'll be talking about the fed's new
inflation target
how does the fed's policy affect
inflation and more importantly
how to beat this inflation after the fed
announced its latest stance on inflation
this article by forbes came out with this
headline mentioning that the fed wants
to create more
inflation so is it true that the fed
wants to create more inflation
let's take a look at what the fed has to
say on their official website this is a
page taken from the fed's official
website and if you take a look here they
mentioned that when
inflation has been running below 2% for a
period of time
the fed will take appropriate monetary
policy to push inflation above 2%
for some time
so as to achieve the target average
inflation rate of 2% over time
so yes it is true the fed wants to
create more inflation
especially when prior inflation rates
are below 2% for a period of
time the fed is taking a more flexible
approach in trying to achieve its
inflation target from having a fixed
2% inflation rate to a more
flexible average 2%
inflation goal to give you an example
previously when the fed still had its
fixed 2%
inflation goal even though actual
inflation has been below the 2%
inflation target
where actual inflation has been
1% for year one
two and three in the previous fixed
inflation goal the fed would still
set its inflation target at 2%
in year four
this means that the fed would use its
monetary policy tools to push actual
inflation in the economy to
2% but this was in the previous
fixed inflation target goal
however moving forward the fed has
shifted its stance on fixed inflation
target to a more flexible inflation
target
using the same example as before let's
say that the actual inflation is
1% for year one
two and three under the fed's new
inflation target
its inflation target for year four would
no longer be 2%
instead it would be at 5% so
why is the fed's inflation target at
5% for year four and not
2%
because as we have seen the fed is now
moving towards an average inflation
target this means that since inflation
has been at 1% for year one two
and three in order for the average
inflation to be 2% for the four
years
the fed has to push actual inflation in
the economy to
5% on year four this is a
simple illustration to explain the
differences between the fed's previous
fixed inflation target and the fed's new
average inflation target the fed will
seek to achieve inflation that averages
2%
over time and when there are periods
where inflation has been running
consistently below 2%
the fed will take appropriate monetary
policy to achieve
inflation moderately above 2% for some
time so this article summarizes the
previous example
now that we have a bit of a better
understanding of the fed's new inflation
target
let's take a look at some ways in which
the fed can affect inflation in the
economy
one way in which the fed can affect
inflation in the economy is through
interest rates interest rates and
inflation tend to be inversely
correlated what this means is that when
interest rates rise
inflation tends to fall and when
interest rates fall
inflation tends to rise so the fed
through its monetary policy tools can
increase inflation in the economy by
lowering interest rates
let's take a look at how this works so
first the fed will decrease interest
rates through its monetary policy tools
and with lower interest rates
more people are able to borrow more
money and when more people are able to
borrow more money
there will be an increase in spending
and when there is an
increase in spending in the economy
there will be growth in the economy and
there will be an
increase in inflation taking a look at
this diagram over here you can see that
there is an inverse relationship between
interest rates and
inflation so one way that the fed can
increase inflation in the economy is
through
lowering interest rates the second way
in which the fed can affect inflation in
the economy is through money supply
and for money supply money supply and
inflation tend to be correlated
when the fed increases money supply in
the economy it can increase
inflation one way in which the fed can
influence the money supply in the
economy is through its quantitative
easing program
otherwise known as money printing so by
increasing the money supply in the
economy it will also increase the
competition for goods and services as
there are more money now
fighting for the same amount of goods
and services and when there's more money
competing for the same amount of goods
and services
it typically creates an increase in
inflation so money supply is correlated
with
inflation when money supply increase
inflation tends to
increase you can also increase the
growth and exposure of this channel by
liking this video and when money supply
decrease
inflation also tends to decrease those
are the two main ways in which the fed
can affect
inflation using its monetary policies
now that you know the fed's new average
inflation target
and how the fed can affect inflation
using its monetary policy tools you can
have a rough gauge of how
inflation is likely to be in the next
couple of years by taking a look at the
inflation rates in the past couple of
years and what the fed is currently
doing right now
if we take a look at the inflation rates
in the years 2010 to
2019 we'll see that in 6 out of 10 years
the inflation rate in the u.s was below
2%
and in the years 2014 and 2015 the
inflation rates were substantially below
the 2%
inflation target rate furthermore if you
take a look at the projected inflation
rate for 2020
inflation is projected to be only at 1%
these falls short of the fed's
2% inflation target rate
and based on the fed's inflation policy
stance the fed is likely to want to push
inflation even higher
and we can see signs that the fed wants
to push inflation above the current rate
through its monetary policies we see
that the fed is lowering interest rates
and we are also seeing the fed
increasing the money supply in the
economy so higher inflation rate in the
future
in my opinion is inevitable which leads
us to a question of how to beat
inflation
the simple answer is this investing
obviously because this is a stock market
channel i'm going to be more biased
towards investing in the stock market
but it doesn't necessarily have to be in
the stock market you can choose to
invest in real estate cryptocurrency and
so on
but the truth of the matter is this you
have to invest
some of you might be thinking right now
that investing is risky
and it is true investing will always
entail some form of risk
but do you know what is more risky than
investing not investing
the reason is this if you're not
investing and your money just lying
around in a bank account you're
guaranteed to lose the value in your
money every year
the interest rates on the typical bank
savings account is no more than
0.5% in fact many at times it is
even lower than that amount
and if inflation is at 2% each
year what this means is that you're
losing 2% of your value of
money each and
every year and we know that inflation is
going to be an average of 2%
each year
because that is what the fed wants to
achieve and the fed is one of the most
important actors in
influencing inflation rates and this is
why it's crucial for you to start
investing
right now be it in the stock market or
in real estate or so on
you have to invest because if you are
not investing your money is guaranteed
to lose value each and every single year
if investing in individual stocks is
risky for you you could perhaps take a
look at investing in the s&p 500 index between the years of 1950 to
2009 the s&p 500 produced a real total
return of 7%
and these returns have already taken
into account inflation
and a quick disclaimer here is that i'm
not a financial advisor
so make sure you do your own due
diligence before investing
are there risks in investing in the s&p
500 sure there is as is similar to
any other investment vehicles for
example if you take a look here during
the 1970s
you see that the real total return for
the s&p 500 is
negative 1.4% and in the 2000s you'll see
that the real total return for the s&p
500 is similarly below
0% so in this case it's
negative 3.4%
so there is especially in the shorter
and intermediate term
but if you take a look at a bigger
picture such as in the years of 1950 all
the way to 2009
you'll see that the real total return
over a longer period of time is
positive if you have learned something
from this video make sure you subscribe
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release one new video about investing
trading in the stock market i'll see you
in those other videos
to your financial success
 
