Fed Chair Jerome Powell Warns That Fight Against Inflation May Be Painful

History suggests that signs of a peak in inflation can create a good backdrop for equities.

Inflation eased in July with lowered energy prices; however, Federal Reserve Chairman Jerome Powell said on Friday that the Fed must continue raising interest rates and hold them at a higher level until it is confident that inflation is under control. Powell emphasized that the Fed’s policy moves have not been enough to achieve that goal so far. 

“While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” Powell said in a speech at the Kansas City Fed’s annual symposium in Wyoming. “Those are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”

Following Powell’s comments, the S&P 500 has decreased over 2% on Friday. Bond investors also quickly adjusted for more interest rate increases from the Fed, with the two-year Treasury yield, which is sensitive to changes in Fed policy, rising close to its highest level of the year at 3.44%, according to the New York Times.

Now, however, may be a good opportunity for investors to reallocate to equity funds, since historically a peak in inflation has been followed by upward momentum for equities.

Long-term investors looking to get back into equities may want to consider an equal-weight strategy, such as the Invesco S&P 500® Equal Weight ETF (RSP) or the Invesco ESG S&P 500 Equal Weight ETF (RSPE), which can provide diversification benefits and reduce concentration risk by weighting each constituent company equally so that a small group of companies does not have an outsized impact on the index. 

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