Fed Dovetail

In consideration of the current labor force participation rate and the fact that many discouraged workers may re-enter the job market, Scott Minerd — Global CIO at Guggenheim Partners — recently predicted the Federal Open Market Committee (FOMC) won’t increase interest rates until as late as early 2016.

[CLICK HERE to view the video, “U.S. Monetary Policy and Fixed-Income Outlook,” by Guggenheim Partners, April 28, 2014.]

[CLICK HERE to read the article, “A New Secular Bull Market?” from Fidelity, June 20, 2014.]

[CLICK HERE to read the article, “Bullard: Markets Think Fed is More Dovish than it is,” from MarketWatch, June 26, 2014.]

Now that the Federal Reserve’s quantitative easing (QE3) program is winding down, insiders are questioning what the central bank intends to do with the bonds it has purchased, which contributed to the bank’s inflated balance sheet, estimated at $4.3 trillion in assets. When you consider that bond values drop when interest rates rise — as it is believed they inevitably will — without an effective exit strategy the Fed’s substantial bond portfolio could suffer. It’s important to recognize that bonds held to maturity will pay at par assuming there is no default. However, since the Fed created this market, the question remains as to what it plans to do with its excess holdings. Chairwoman Janet Yellen has indicated that this fall the Fed will announce a revised plan to shrink its balance sheet.

[CLICK HERE to read the article, “Fed’s Balance Sheet Punctuated by a Big Question Mark,” from The New York Times, June 27, 2014.]

[CLICK HERE to view the chart, “Walking a Tightrope: How Deutsche Thinks the Fed Will Exit Ultra-Loose Policies,” from Fox Business, accessed June 27, 2014.]

One analyst at BlackRock suggests that the Fed’s decision to keep interest rates low actually may be inhibiting economic growth and job creation. For example, low rates create a tenuous environment for older workers to retire and live on a fixed income. With delayed retirements, fewer jobs open up, which serves to keep the jobless rate high. Furthermore, because it’s cheaper to borrow money now, many corporations have put plans on hold to reinvest in organic company growth.

[CLICK HERE to read the article, “5 Reasons Why Excessively Low Rates May be Harmful to the Economy,” from BlackRock Research, June 26, 2014.]

Today’s FOMC is generally described as “dovish,” meaning it takes a more minimalist, inflation-tolerant approach to money policy, while the opposite is called “hawkish.” Hawkish policies generally favor higher interest rates and tighter monetary controls to keep inflation in check. At the moment, the current low interest-rate environment is expected to last at least throughout this year. Much depends on the unemployment rate, which has proved skittish to follow a strong trend one way or another.

With the woes of the past economic recession still fresh on American minds, it stands to reason that commodity prices and jobs continue to be the standard by which economic growth is measured. If you have concerns about either in your life, or would simply like a mid-year review to discuss your current retirement strategy, please give us a call.

Our firm assists retirees and pre-retirees in the creation of retirement strategies that include the use of insurance products.

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