Moolah Blog!

So, as you might have noticed, it looks like the Fed finally understands the importance of a tighter monetary policy! Especially when other economies like Canada and countries in Asia and Europe are accepting that inflation is a major issue.

The Federal Reserve coming up with tighter monetary policy is within my forecast before the year ends.

I’m excited about it though! Personally, I’ve said it since the beginning… They should have had a tighter fist with the interest rate than they have had in the recent past dropping the rate down as low as they did! It is impossible for them to just ignore rising prices and hope that they will just go away! Inflation has risen, in great part, due to the commodities moves lately (pricing high!). The good thing about this is that Bernanke is not the only person worried about this. You have some major folks and one of those people is Fed Vice Chairman Donal Kohn! He noted that its “very important to ensure that policy actions anchor inflation expectations.”

It wasn’t just Bernanke sounding the alarm, either. Fed Vice Chairman Donald Kohn also noted that it’s “very important to ensure that policy actions anchor inflation expectations.”

So what does this mean for you?

First, keep your fixed income investment in short term treasuries like three month bills and then reinvest your funds in higher and higher yields as short term rates rise! You can take a look at Treasury-only money funds.

Second, consider hedging your interest rate exposure! There are both mutual funds and EFTs that allow you to “short” the bond market! What the EFTs do is short the bonds for you. You watch the value RISE as bond prices decline and interest rates increase! Rising interest rates is the Feds way of strict or tight monetary policy.

Last, If you have an adjustable rate mortgage and you are approaching your rate reset date, do it! Refinance to a fixed rate loan!

SUMMARY: These are tricky times in the interest rate markets and you would do best to try and navigate through all the turns and twists in order to protect your nest egg from the threat of rising rates and sinking “interest rate” sensitive stocks!

If you take anything from this article at least take this with you. As Fed increases interest rate, value of bonds goes down. So if you buy EFTs that short bonds, an increase in the interest rate by the Fed would make you some green!