Edgy Economy: Inflation, Interest Rates Cause Concern

It's a strange time for the economy. The recovery from the coronavirus pandemic continues, with the stock market near record highs, unemployment slowly declining, and bullish economic growth forecasts as businesses reopen and travel resumes. Nevertheless, those positive signs are offset by rising long-term interest rates, rising inflation due to the flood of stimulus money, and general uncertainty over Biden administration economic policies.

All of those competing factors have the Federal Reserve walking a tightrope, trying to help the economic recovery continue while keeping it from heating up too fast. "The Fed is doing all they can to stay status quo," says Scott Bishop, Executive Director of Wealth Strategies for Avidian Wealth Solutions. "They want to keep rates low, not have significant inflation, and also be able to keep employment growing."

While the Fed announced last week it expects to leave short-term interest rates at their current low rates for the foreseeable future, investors are growing wary of long-term rates headed in the opposite direction. "We've seen the yield on the ten-year Treasury go from well under one percent to well over one percent, and people are getting a little bit nervous," says Bishop.

The other big concern is inflation, with the Fed signaling they will allow it to drift higher than it has been in recent years. "The Fed's mandate is to keep (inflation) at around two percent, but I think the Fed will give it a little wiggle room," says Bishop. "I think it will be more like historically moderate inflation over the next several years---maybe 3 to 4 percent---but my bet is more on a stagflation scenario in the outcoming years...I'm really not worried about hyper inflation."

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