Within the last few months the US Federal reserve has cut interest rates from 5.25% to 2.25%.

How the dollar decline helps.
A decrease in the value of the dollar will make US exports cheaper and imports into the US more expensive. This should significantly reduce the trade deficit. US Multinationals which make a lot of their money overseas will do great. Financial companies will have access to cheaper money which will increase liquidity and profits for financial companies. Interest rates on housing loans should decline and Adjustable rate mortgages which reset will have a smaller increase for the time being. Here is an article on how to make money off the dollar decline.

The big question. Whats next?
Based on the reasons i stated above the market seems to think this is positive but I disagree. The reason the fed is reducing interest rates is because they see a major recession looming. The fed cites that “core inflation is under 3%”. Core inflation is also known as CPI excluding food and energy. If you can find people that do not eat, do not drink, do not drive or use electricity then by all means core inflation can be used. Personally I eat, drink, drive and use electricity so for me the Consumer Price Index is the real measure of inflation. Interest rates are supposed to be higher than inflation. The Inflation rate is currently over 4%. With interest rates at 2.25% people that hold Cash in savings accounts, CDs or money market accounts are losing money.

Here is a chart from the Cleveland Fed. Click the chart for a better image.

Inflation1990to2008

As you can see at the end of the chart, while Core CPI remains low the actual CPI has shot above 4%. So what protects your investment when there is high inflation? Treasury Inflation protected securities. If inflation remains at this level for a significant period the fed will be forced to increase interest rates dramatically to combat inflation. If the fed delays controlling inflation we may have a bigger problem. Lets just hope we don’t need to bring back Paul Volcker who had to boost interest rates to 20% and put the economy into a recession to combat inflation and end the stagflation of the 70s.

The easiest way to invest in TIPS is to buy the exchange traded fund TIP
Another new exchange traded fund WIP has recently started trading. WIP is a global TIPS fund with exposure to 18 Countries and 15 Currencies.

Disclosure: I do not own TIPS, WIP.