Inflation, Elections and Other Four-Letter Words

Inflation continues to be the bugaboo beleaguering the economy. Affordability remains the number one concern on people’s minds. This does not bode well for the political party in power in Washington, D.C. Mid-term elections typically favor the party out of power, and with the cost of living continuing to rise due to multiple factors, including the Iran War and tariffs, we will most likely be dealing with divided government for the next two years. Divided government, where one party controls the White House and the other party controls all or part of Congress, isn’t necessarily bad for the economy or the markets. It usually means the status quo remains in place, allowing companies to make longer-term plans without worrying about major changes to the regulatory or market environment.

Due to inflation rising at an annual rate of 3.4% for the year ending in August, the Federal Reserve raised the interbank lending rate at its last meeting by a quarter of a percentage point, to between 3.75% and 4.00%. With inflation still above the Federal Reserve’s 2% goal, raising the interbank lending rate should slow the economy and help tame inflation. They aren’t done. The Federal Reserve is expected to raise rates again before the end of the year. Hopefully, they only need to raise rates one more time. While the economy has been very resilient, a sustained dose of rate increases could be detrimental to the economy and the market.

Have you heard about Roth Conversions? Early in retirement, before taking Social Security, most retirees’ incomes drop, putting them in a lower tax bracket. One strategy for minimizing future taxes is to use this period to take some money out of your 401(k) or IRA and move it to a Roth IRA. When you do this, you pay taxes on the converted funds, most likely at a lower rate than you would pay if you waited until you were required to withdraw the funds through Required Minimum Distributions. The benefit is that any growth in the Roth IRA can be tax-free if the applicable requirements are met, including the five-year holding period. If you think a Roth Conversion might be a good idea for you, let us know, and we can help you determine the best course of action.

Very truly yours,

Michael F Cantlon
Thomas E Guyett
Robert T Gephart