Similar to every politician, they would like to have the cake and eat it to. On almost every issue, they often promise or promote a perfect outcome, however the reality is far from perfect and by the time it comes to a reckoning, they have moved on. An example is interest rates and inflation.

In an article by Howard Schneider and Jacob Bogage of Reuters, before President Trump became President his principal occupation was a real estate developer. The world of real estate development loves low interest rates because most of the money to do the work is borrowed. Once the building is completed, then rents come in and sometimes inflation is a good thing because it pushes up the value of the building. President Trump often talks about having a 1% interest rate, is that feasible? practical? and even desirable?

Analysts believe if the US Federal Reserve (the Fed) changed rates from 3.75% to 4% and lowered it to 1%, the markets would react and not positively. There would be a massive dislocation of the global financial system and end up with the US government paying more to borrow than it does in present bond markets.

J. Benson Durham, founder of DASM investment research firm, believes it would be cataclysmic. The reason is treasury rates would climb as investors priced up higher inflation. Countries such as Germany could offer a bit more as money flowed to more stable countries and the dollar would plummet.

President Trump is going into the midterms with mortgage rates near 7%, prices for ground beef and gas rising. Inflation has increased partly due to the President’s policies regarding tariffs and the war in Iran which increased energy costs.

The Fed’s preferred inflation measure was 2% and the Fed does not expect that number to happen until 2029 at the earliest. As well as the Fed Chaiman Kevin Warsh is an inflation hawk. He really wants inflation to fall and price stability to be the norm, but it was unanimous when the Fed increased rates.

Linking to dividend paying stocks, a low inflation is great for dividend paying stocks because total returns of stock price gains and dividend yields often exceed the corresponding bond rates. However, when interest rates go up, the alternative in fixed income securities looks very attractive. If you can buy US government bonds or top tier corporate bonds with high yields, it would be wise to shift some money out of dividend stocks. Just remember economic cycles happen and be prepared to shift back.

There are more questions than answers, till the next time – to raising questions.