Ultimately, the Fed is saying that rates will be at the zero bound for the foreseeable future, which means the next couple of years, or until unemployment gets back to pre-COVID levels and we start seeing an uptick in inflation.
If inflation starts to build, the first sign will be declining bond prices, which will happen before the Fed starts raising rates. Inflation is a bond investor’s worst nightmare, and in the early 1980s (when you could get double digits rates in a Treasury), Treasuries were referred to as “certificates of confiscation,” which meant the rate of inflation was higher than the yield on the bond. Sure, you were getting interest, but the purchasing power of that money was dramatically lower. Bond investors should be wary at these levels, as the risk-reward characteristics are unappealing right now.
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Read More: What the Fed’s New Long-Run Inflation Outlook Means for Your Portfolio | Smart