On December 16, 2008, the Federal Reserve cut its target for the shortest-term interest rate to nearly 0%. The Fed’s bold policy action was one of many aggressive steps taken to stabilize global financial markets and a U.S. economy that was in freefall. The Fed’s goals have been clear: prevent broad-based wage deflation, lower borrowing costs, rouse investors’ animal spirits, create incentives for risk-taking and, ultimately, investment in new ventures that would create new jobs, the engine of a self-sustaining recovery.
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Note: For an expanded look at Vanguard’s outlook for inflation—and an explanation of the data behind our analysis—read our interview with Joe Davis on vanguard.com.
As Vanguard’s chief economist, I’m often asked about inflation. And it’s an important topic. As the 1970s and early 1980s taught us, a persistent and unexpected run-up in inflation can significantly influence the economy, interest rates, and, by extension, the returns on stocks, bonds, and other investments.
Some of my friends are convinced that a return to the high inflation of the 1970s and early 1980s is inevitable. They point to the sharp rise in the Fed’s balance sheet (in addition to the temptation for governments to “inflate away” their national debt) as setting the stage for, at best, a return to 1970s-style inflation rates of 10% or more and, at worst, a significant crash in the U.S. dollar and stock market.
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There’s a good reason why regulators require financial firms to include, when mentioning the past returns or ratings of a mutual fund, the warning: “Past performance is not a guarantee of future results.”
The warning is true. History is an imperfect guide to the future, or historians would be fabulously wealthy investment sages.
But history does seem, if not to repeat, to rhyme from time to time. Read more »
My recent comments about the performance of retirement accounts elicited a wave of comments from Vanguard investors about poor stock market returns. Here are a few thoughts in response.
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I was at a garden party recently, on a beautiful Sunday afternoon in September, where talk centered around the economy, politics, favorite movies, and the latest in electronic gadgets. Yet one conversation that struck a particular chord with me was the “case for China.”
You’ve heard it repeated in various forms. The Chinese economy is booming, while the developed economies are in a funk. Chinese infrastructure is gleaming and new, while U.S. infrastructure is falling apart. Output from the Chinese economy will soon exceed U.S. output, signaling the end of American influence and prominence in the world. The argument is actually much broader and about emerging markets in general. The emerging economies are ascending, and the U.S. and other rich countries are washed up.
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