Over the past year, inflation has become a pressing concern for many Americans. There has been a spike in everything from mortgage and interest rates on vehicles to everyday prices of consumer goods and food.
While investors were elated by the break in interest-rated hikes last month, financial experts project that the Federal Reserve likely will continue the rate increases. That will hike rates by a quarter point at the end of its meeting next week.
Fed Chair Powell and other Fed officials have said they will actively try to mitigate increasing living costs, repeatedly expressing concern over their effect on American families. However, despite recent falling inflation levels, overall levels remain much higher than the central bank’s 2% goal.
Since March 2022, the central bank has increased its benchmark rate ten times to reach a targeted range of 5%-5.25%. This is the swiftest pace of tightening since the early 1980s.
The Struggle of Rate Hikes
Many Americans are struggling with the higher living costs and have faced challenges when purchasing a home.
“Rising interest rates can sometimes feel like a double-edged sword,” said Kelly LaVigne, vice president of consumer insights at Allianz Life. “While savings accounts are earning more interest, it is also more expensive to borrow money for big purchases like a home, and many Americans worry that rising interest rates are a harbinger of a recession.”
Short-term borrowing rates are the first to jump. Already, “the cost of variable rate debt has gone up substantially,” said Columbia Business School economics professor Brett House. And yet, “people continue to consume.”
However, “we are getting closer and closer to the point that those excess savings are going to be exhausted, and the effect of those rate hikes may bite quite quickly,” House added.
Purchasing a vehicle is another area where higher interest rates create pain for consumers.
“The double whammy of relentlessly high vehicle pricing and daunting borrowing costs is presenting significant challenges for shoppers in today’s car market,” said Ivan Drury, Edmunds’ director of insights.
ETFs That Could Serve As A Buffer Against Inflation
For investors looking for a potential hedge against inflation, the Quadratic Interest Rate Volatility and Inflation Hedge ETF (IVOL) is one Fund to consider.
IVOL seeks to hedge the risk of increased fixed income volatility and rising inflation and to profit from rising long-term interest rates or falling short-term interest rates, often referred to as a steepening of the U.S. interest rate curve, while providing inflation-protected income. The Fund invests in a mix of TIPS.
The Vanguard Short-Term Inflation-Protected Securities ETF (VTIP) is another fund to look into.
VTIP tracks an index of inflation-protected securities backed by the U.S. government. The Fund invests in debt with a remaining maturity of less than five years. The mix of short- and medium-term duration also protects the Fund against rising interest rates, which tend to put a larger dent in the value of longer-dated Treasuries.
The tradeoff is that shorter-dated Treasuries provide lower returns. VTIP may be a good choice for investors who want the safety of U.S.-backed government debt but are also worried that a sudden surge in inflation — and the likelihood of a resulting interest rate hike — will drag down the value of longer-dated Treasuries.
For more news, information, and strategy, visit the Fixed Income Channel.