TIPS for inflation
In February 2018, Jerome Powell was appointed as chair of the board of governors of the Federal Reserve System. He became the 16th chair to take over the helm of the world’s most influential central bank. Among other duties, he and the Fed governors are tasked with adjusting short-term interest rates to help control inflation in an effort to promote overall economic growth.
Until 2021, inflation had remained relatively low, which had allowed the Fed to maintain an accommodative monetary policy. More recently, the Fed has been increasing short-term interest rates to combat high levels of inflation.
A few TIPS
Unlike conventional U.S. Treasury bonds, the principal amount of Treasury Inflation-Protected Securities, or TIPS, is adjusted when there are changes in the Consumer Price Index (CPI), which measures changes in inflation. When the CPI increases, a TIPS’s principal increases. If the CPI falls, the principal is reduced.
The relationship between TIPS and the CPI can affect the amount of interest you are paid every six months as well as the amount you are paid when your TIPS matures.
Remember, TIPS pay a fixed rate of interest. Since the fixed rate is applied to the adjusted principal, interest payments can vary from one period to the next. TIPS help eliminate inflation risk to your portfolio as the principal is adjusted semiannually for inflation based on the Consumer Price Index — while providing a real rate of return guaranteed by the U.S. government.
When TIPS mature, the bondholder will receive either the adjusted principal or the original principal, whichever is greater.
If you are concerned about inflation — and expect short-term interest rates may increase — TIPS are an investment that may be worth considering. A close review of your overall strategy might also reveal other investment choices that may be appropriate in an environment of changing interest rates.
Inflation in perspective
For the 20-year period ended 2021, the Consumer Price Index averaged a 2.15% inflation rate per year. In 2022, however, inflation was well above its long-term average.
Source: USInflationCalculator.com, 2022
Richard H Mootz, CFP® CERTIFIED FINANCIAL PLANNER™ professional, is a registered representative of and offers securities through Securities America, Inc., a registered broker/ dealer, member FINRA/ SIPC., advisory services offered through Securities America Advisors,
Inc., A SEC Registered Investment Advisory firm. Mootz Financial Solutions and Securities America Companies are not affiliated. Mootz can be reached at 530877-7007; by email rick@mootzfinancial. com or at www. mootzfinancialsolutions. com. Securities America and its advisers do not provide tax or legal advice. Please consult with your tax or legal professional regarding your individual situation. CA Insurance Number 0C75924. The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.