TIPS are more likely to perform well – relative to various asset classes – in periods of monetary easing and increasing inflation. However, they have the potential to add value in any environment.
What this chart shows
Historically, Fed policies have influenced the availability of money and credit, affecting both economic growth and inflation. Because the value of TIPS changes with the rate of inflation, their performance is directly linked to the Fed’s monetary actions.
What it means for investors
Although TIPS may perform better in certain environments, their low correlation with other types of investments, such as equities, can help reduce overall portfolio volatility. Essentially TIPS have the potential to be an effective diversification tool in any phase of the economic cycle.