Do Federal Reserve inflation targets eliminate the need for inflation protection?
Monday, June 12th, 2006
Categorized as: Savings Bonds and competitive investments
What is your stance on Bernanke’s goal of keeping inflation limited to 1%-2%? If he is successful, wouldn’t that virtually eliminate the need for TIPS and I-bonds?
Do you expect your house to burn down? If you’re like most people, you would rate the chances of that happening to be almost zero. Nonetheless, like most people, you have fire insurance.
Do you expect hyperinflation? If you’re like most people, you would rate the chances of that happening to be almost zero. The difference is that hardly anyone has inflation insurance.
The point of investing in Series I bonds is that you give up the chance of earning more in exchange for the certainty of getting back all of your money, with interest, no matter what happens with inflation.
TIPS are similar, but, unlike I bonds, they don’t protect you from potential capital losses (or gains) caused by changes in the prevailing level of interest rates.
If Federal Reserve Chairman Ben Bernanke meets his inflation goal, it just means we bought fire insurance and the house didn’t burn down. We’re always better off when the house doesn’t burn down, even if we paid in advance for insurance.