Investments: Is 2% Inflation Still Attainable?
Just when it looked like there was a good chance the Federal Reserve would hold rates steady, ongoing tensions in Iran and persistent inflation have put pressure on the Fed to raise interest rates. According to the CME Group Fed Watch tool, the odds are about 50/50 on a rate hike being announced at the Federal Open Market Committee’s (FOMC) meeting next week. This is a major shift from before Fed Chairman Kevin Warsh’s speech at the Jackson Hole summit Friday August 28th, as he emphasized fighting inflation was currently the Fed’s highest priority. However, it is worth taking a step back and examining the current inflationary environment we are in itself. From the aftermath of the 2008 Financial Crisis to the outbreak of the Covid pandemic, inflation averaged below 2% and borrowing costs were historically low. Globalization, the offshoring of manufacturing, technological advancement, and the growth of e-commerce all helped keep prices stable for much of that period. As we continue to get accustomed to the economy post-Covid, it is important to raise the question: Is a 2% inflation target still realistic? Dating back to when inflation data first started being tracked in 1914, inflation in the U.S. has averaged around 3.3%, suggesting the 2% target is not necessarily the historical norm. Many economists now argue factors that pushed inflation lower in the 2010s have now begun to reverse. Heightened geopolitical tensions and a renewed emphasis on domestic manufacturing have increased supply chain and labor costs, while ballooning government deficits have also put upward pressure on prices. These are all long-term headwinds that could bring about a new era where 2.5%-3% is the new inflation reality. At the same time, there are a few tailwinds that could make the 2% target attainable. Increased productivity through Ai, paired with a Fed determined to keep inflation down, could lead to a return to the 2% inflation target that we knew for more than a decade. Ultimately, the question is not whether the Fed can bring inflation back to 2%, but what it would cost the economy to keep it there. If the forces shaping inflation have in fact fundamentally changed, investors should be prepared for a world in which interest rates, borrowing costs, and inflation remain higher than the unusually low levels we became accustomed to during the aftermath of the Great Financial Crisis of 2008.
Sources: Investopedia – 7/22/2026
Planning: Munis
When evaluating a potential investment, factoring in the return is only part of the equation. Ultimately, what matters most is how much return you keep after taxes. For investors in higher tax brackets, municipal bonds can serve as a good source of income while offering meaningful tax advantages. Interest from most municipal bonds are exempt from federal income tax, while some can even be exempt from state and local income tax as well. Because of the tax treatment, a low yielding municipal bond can sometimes provide more after-tax income than a higher-yielding taxable bond, such as a corporate bond. For example, for someone in the 37% tax bracket, a municipal bond yielding 4% would be more advantageous than a 6% corporate bond. Why? Because once you have paid taxes on the corporate bond, you end up with a tax-equivalent yield of around 3.78%. Municipal bonds are not right for every investor, but for those in a higher tax bracket holding bonds in taxable account, they can be a great tool for improving tax efficiency and keeping more of the income their portfolio generates.
