Federal Reserve Bank Archives - Sycamore Financial Group

Hello from Sycamore,

Inflation is a topic that we’re all hearing about lately. The Federal Reserve Bank (the Fed) has started to raise interest rates to help fight our current inflation. The Fed has a long-term inflation target of 2.0%. To simplify, this means that if a Coca-Cola costs you $1.00 today, then next year that same soda should cost you $1.02. When looking at the effect of inflation for a single year it seems insignificant, let’s look at the longer-term effects. Assume you have $100,000 sitting in cash earning no interest, what will this buy you 15 years from now assuming an average inflation rate of 2.0% each year? It would have a buying power of about $74,082 in today’s dollars. In other words, nearly a 25% reduction in purchasing power due to inflation. While your savings account balance is not declining, the amount of goods and services your money can buy, or your purchasing power, is reduced.

During your annual meetings, we update your financial plans and typically discuss your cash on hand and your emergency fund. This is a different number for everyone but typically somewhere between 3-6 months of living expenses is a good rule of thumb. Also, at different stages of your life, the number that’s right for you may change based on your situation and is a number that also coincides with your risk tolerance. The best number is the one that helps you sleep at night.

How can you lessen the impact of inflation? Our best advice is to keep your emergency fund such as a savings account or money market fund in a low-risk account that earns a competitive yield (several are yielding about 2% today). Then, to build wealth over the long term, try to maintain a well-diversified portfolio of various financial assets that have the potential to grow at a rate greater than inflation.

As always, never hesitate to contact us with any questions or concerns.

Thank you for your continued trust and support,

Sycamore Financial Group

***This article is distributed for general informational and educational purposes and is not intended to constitute legal, tax, accounting, or investment advice.***

Thoughts on the Economy

Hello from Sycamore,

COVID-19 has been a shock to our economy and our lives. As a result, the Federal Reserve Bank had to implement swift and significant monetary policy changes. During the onset of the pandemic (March/April 2020), there were worldwide shutdowns that caused many to lose their jobs, miss paychecks that were necessary to pay bills, and companies shuttered. The Fed knew that they needed to take an approach that would spur the economy as much as possible as the country started to reopen. They did this by reducing the reserve requirements for depository institutions, they bought bonds in the open market, and they reduced the interest rate to nearly zero. All these measures made the economy flush with cash, borrowing cheap, and saving not lucrative.

The extra cash that these changes have generated has spurred inflation, but inflation is not always a bad thing. The Federal Reserve has a long-term target inflation rate of 2%. The right amount of inflation in a stable economy can influence expansion. While ongoing inflation issues are certainly possible short-term, we think prolonged inflation or hyperinflation seems unlikely.

If inflation would persist, however, there are a few ways that the Fed can help slow economic activity. These are through changing reserve requirements at depository institutions, open market operations, and setting the discount rate.

Reserve requirements refer to how much of a bank’s total deposits must be kept at the bank at the close of business every day. For example, if a bank has just $500 in deposits and the reserve requirements were 10% then they would only be able to loan out $450. Changing the requirement changes the money supply.
Open market operations are when the Fed either buys or sells government securities in the open market. If they sell securities, they are removing money from the economy by exchanging securities for cash. If they buy securities, they are adding money to the economy by exchanging cash for securities.
The discount rate is the rate that the Federal Reserve would pay to banks for depositing funds with the Fed overnight. This effectively sets a floor on the interest rate and the rate trickles down and influences other interest rates on loans such as car loans, personal loans, mortgages, business loans, etc.

All these measures can be used in different proportions to influence the economy and at various times or simultaneously.

Thank you for your business and trust,

Sycamore Financial Group

***This article is distributed for general informational and educational purposes and is not intended to constitute legal, tax, accounting, or investment advice.***

How Does Inflation Impact My Savings

Thoughts on the Economy