Money For the Rest of Us: Will Quantitative Tightening Lead To Even Greater Financial Losses?
The Federal Reserve is “taking away the punch bowl” as the latest economic party has long been in full swing. Historically, doing so can lead to challenges for investors.
That’s because rising interest rates and a slowing economy tend to slow investment returns. But that trade-off may be worthwhile, if it means curbing today’s high inflation rates. The process underway right now is known as “quantitative tightening.” And it could lead to further declines in the stock market.
In the past, such measures to raise interest rates and curb inflation mean short-term pain. But if the economy ends up on a stronger footing, then investors may be better off in time.
The Fed lightly tightened between 2015 and 2019. They did this by gradually raising interest rates off of 0 percent. The economy managed to grow during that period, only to fall during the pandemic. And stocks performed well on an annualized basis during this period, averaging 11.3 percent annually.
Right now, the Federal Reserve continues to tighten, even as economic data indicates the economy is already slowing. That means that, even with high inflation rates, investors may not want to gravitate towards having more cash on hand.
Investors may feel crunched for cash right now with rising interest rates, but given how asset classes perform even during periods of tightening, a better use for cash on hand right now may be to buy oversold assets now.