The Fed is taking extreme steps at the moment and its current strategy is out of anything considered normal in the books. Other central banks follow the lead and thus it may be necessary to prepare for the future. Let’s take a look at what tactics the Federal Reserve is taking and what to prepare for.
The Fed’s strategy
Fed actions are known to keep the federal funds rate at virtually 0%. It buys about $120 billion worth of corporate bonds every month. Thus, the Fed commits to buying $1.44T or more worth of bonds per year. After adding in bank lending, US government deficits and government stimulus combined mean that the total increase in the money supply (M2) over the past year was $4T – or 25%. Jerome Powell has promised to take extreme action “over the long term” even if inflation “temporarily” rises above the 2% target.
CNB and inflation target
It is interesting to note that the inflation target of the Czech National Bank is also set at 2%, however it is starting to be evident that the central bank will not be able to maintain the inflation goal and thus it might be the first central bank in the EU to start increasing interest rates.
Rising inflation is the biggest problem. With excess money and an optimistic growth outlook, inflation will be a natural consequence. Rising long-term interest rates are also a problem that many people overlook. The Federal Reserve cannot control longer term interest rates. Those rates are controlled by smart Wall Street bond investors. Another problem is rising stocks. They will rise in line with the growth outlook, rising optimism, and the growing need for inflation protection.
Another problem is that while money is readily available, it does not by itself create growth in the economy or provide support. Neither firms nor people will borrow money simply for the sake of having easy access to it. Nobody wants to go into debt at the moment.
What you can do
With the system’s current strategy, it is a good idea to be prepared. You can try alternative options such as digital currencies. Platon Life offers an ecosystem where you can experience firsthand how friendly and secure a digital environment can be.