Inflation, if you started to trade recently, this is the most used word in 2022, so what exactly is it? Well, the short answer to this question is, basically your money is worth less than before. An example would be like this: In 2021 bread cost 1$, but now in 2022 with the rise of inflation bread costs 1.5$. That 1$ of 2021 can’t buy the bread from 2022, your money is worth less. This has been going on for years now, and The Federal Reserve is in charge to control it.
How does the FED control inflation?
The Federal Reserve has a few goals it focuses on in the economy: to promote maximum employment, keep prices stable and have moderate long-term interest rates.
Generally, the central bank aims to keep inflation around 2% annually, a benchmark that it lagged before the pandemic but now must address.
The Fed’s main tool it can use to battle inflation is interest rates. It does so by setting the short-term borrowing rate for commercial banks, and then those banks pass it along to consumers and businesses.
How long does it take for the FED to bring inflation under control?
According to history, and recent recessions the FED needs at least 9 months to tame inflation back into it’s place, by raising rates the FED ‘slows down’ the economy, and makes the borrowing more expensive. But with todays hot inflation, it will need perhaps a few more months to get things back in order, that is our opinion.
Will there be a recession?
That’s a million dollar question that no one can answer, the market is so unpredictable, and no one can time the market just right. Analysts and other retail traders just follow their instincts, depending on the data’s they read, depending on the economy’s trajectory and many more factors are being looked before they take a decision. Right now? No one knows if this is the bottom, or if we’re just halfway down and maybe there’s more room to go down. Goldman Sachs said that the worse case scenario would be the market going right down to 3,600$, and it’s so close hitting this price. But then again, there’s other articles that suggest S&P could even hit 3,000$.
When will we see an upside?
That’s also hard to tell, if we look at this realistically right now, the world economy is in shambles, high inflation, the war, supply chain issues, chip shortages, soaring commodity prices out of a few problems that have been circulating the globe this year, the market took a huge hit right in the manhood. The World Bank even said that for 2023 and 2024 they’re lowering their expectations for the world economy. So, if we look at the big picture, market took lots of hits this year, maybe, just maybe we will start to see an upside at the end of this year, but then also, we likely won’t see any new highs in the recent years.
What are good inflation hedges?
For years and years, Gold has been an inflation hedge historically. And recently cryptocurrency was also a safe haven, but now that has changed significantly as they crypto market had started to mimick the stock market. There’s real estate who is now expected to fall due to high inflation, but perhaps if it’s lucky it will survive, you never know.
Is it better to hold cash or invest at times like these?
Personally, invest 60 percent and keep 40 percent cash, you will need it. It’s better to put those 60 percent to work than to fall victim to the rising inflation.
How does inflation affect the markets?
The higher the inflation, the stocks will suffer due to the FED trying to tame in inflation by raising their rates. However during the COVID-19 crisis, the stock market went crazy bullish, you might wonder why? That’s because FED removed hikes and started printing more money to keep the economy afloat, this encouraged businesses to borrow more money and continue their business, this led the market to become very bullish with more than 85 percent of SPY companies to report positive earnings. However, now that COVID-19 is almost ‘over’ the economy is starting to feel the pressure.
