Hello everyone and welcome to that time of the week again. So, grab yourself a cuppa, settle back and enjoy the latest edition of News, Views and Truths.
The big news this week was, once again, driven through the actions of the US Federal Reserve. We spoke about their intention a couple of weeks ago, but on Wednesday this week, they confirmed their new course of action in respect of monetary policy. And the market reacted.
It said it doesn’t expect to raise interest rates until the end of 2023 at the earliest and it set out new economic conditions that must be met before it will raise them. In a statement, the Fed said it decided to keep its policy interest rate at near-zero and expects this will be appropriate until two things happen: firstly, for job market conditions return to “maximum employment” which essentially means Pre-Covid levels and secondly, inflation has risen to 2% and “is on track to moderately exceed 2% for some time.”
So if you were not sure about it before, take it as read: interest rates are not going up for a long, long time.
However, the more important part, in my eyes, was the inflation piece. As mentioned at the most recent Jackson Hole Symposium, where this approach was signposted, the Central Bank will be more than comfortable with letting inflation rise above the target 2% level. And as that 2% figure will be used as an average, due to the fact that inflation has been consistently low for a considerable period, the expectation is for inflation to increase well above 2% for periods of time.
That must be a huge consideration for anyone with savings. It is the perfect storm of low rates and high inflation.
As financial advisers, we speak about this to clients all of the time. Yet, I get the feeling that the urgency of this is not fully appreciated. So, let me give you an idea of the effect of inflation:
Let’s say you can get your hands on a 1% interest rate; over the next ten years, as long as that rate stays the same, you will receive a compound return of 10.46%. Pretty simple maths.
However, if you factor in inflation, that is eroded. At a 1% inflation level, that effectively removes all returns. At 2% that reduces the value of the savings by 10.46%. At 4%, over ten years, the effect of inflation on savings receiving an annual interest of 1% would be to reduce the value by 39.33%.
Although you can look at the value of your savings and feel comfortable that you are “protecting” your capital from short-term volatility, you are watching your spending ability erode. And because you cannot see it, you need to understand it.
And to understand it, sign up for our next webinar on Wednesday 23rd September 2020 at 10.30am. Not only will we be taking attendees through the history of savings and the current state of play, but we will be outlining our long-term solution, which is focussed upon an environment of increasing inflation levels and low-interest rates. If I’ve said it once, I’ve said it a hundred times; you genuinely cannot afford to miss out.
My weekly podcast is live here, with this week’s guest, Joe Capaldi, of Charlotte Square Investment Managers, in Edinburgh. Joe outlines the performance of the junior UK equity market, AIM and highlights the reasons for the recent outperformance of the smaller index over the FTSE 100.
That is it for another week. Stay safe, OBEY ZE CURFEW and I shall see you all next week.