The Federal Reserve announced this afternoon that it would hold interest rates steady. It also said the downward spiral in prices was easing, while inflation was less of a threat. Either way, exchange traded funds (ETFs) could be affected.
Federal Reserve Governor Kevin Warsh reads recent inflation trends as positive, as there has been some price stability and deflationary risks seem tamed. Meanwhile, the Fed is keeping overnight interest rates in the 0% to 0.25% range that was hit in December and said they were likely to stay that way for some time.
Chris Isidiore for CNN money reports that the inflationary factors are evident, such as a rise in oil prices, loss of value on the dollar, and the rise on Treasury yields all signal signs of higher consumer prices. Deflation is supported by rising unemployment and low factory utilization, which may be signs that prices will fall further. This cycle would be more destructive to the economy at this point.
Despite soothing words about inflation and deflation from the Fed, there are ways to be on your guard for either scenario.
Inflation. The large volumes of money smothering the banks has economists and financial advisers worried over inflation. The main sign of inflation can be seen through the Consumer Price Index (CPI).
How To Play It. Rising inflation would deteriorate asset value over the long-term for bondholders, and a way to combat this is through Treasury Inflation-Protected Securites (TIPS). Another way to hedge against inflation is through commodities, gold being a classic inflation hedge.
Deflation. A deleterious cycle can be created as banks stop lending, businesses halt expansions, wages fall, people reduce spending and prices would be driven further downward. The CPI is a good indicator for deflation.
How to Play It. Investors should look to short-term investment strategies, such as short-term certificates of deposit or money-market funds. But those with a 10-year time table could look into the technology sector since companies that seek to boost productivity will do so through technology.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.