It appears that the Fed is hedging their bet with their post-meeting commentary. Even though Chairwoman Janet Yellen has stated that they are on pace to raise rates twice before the end of the year, one has to wonder if it will occur.
In Chairwoman Yellen’s speech; growth and inflation expectations have been ratcheted down for this year despite the recently reported employment data which was strong. One must ask if they are reading something that we aren’t.
Some economists and “Fed watchers” have spoken out recently that the possibility of further international disturbances has influenced the Fed’s decision. Greece, China and other hot spots continue to simmer and in many instances a positive resolution is beyond their control. Foreign Central Banks and the International Monetary Fund officials are also asking the Federal Reserve to wait before increasing rates as well.
Media outlets have said that there is also a great fear by some members of the Fed that raising rates before the economy gathers even further steam will cause a similar economic downturn to what occurred during 1937. If that is a growing feeling, then there is an increasing probability that rate increases will be delayed or even postponed until sometime even further into the future then what is currently expected.
This leads me to the title of today’s blog. “Are We Going the Way of Japan?” Since the early 1990’s, Japan’s government has been trying to stimulate inflation and personal consumption by spending massive amounts of money. Those efforts failed miserably and the debt to GDP has soared due to this experiment.
Under the leadership of Prime Minister Shinzō Abe, Japan embarked on a new program (known as Abenomics). It is similar to our quantitative easing but with the added measure of continuing the massive fiscal stimulus program.
In addition the program raised sales and use taxes to pay for the fiscal stimulus. His belief is that more economic good can come from generating taxes on consumption instead of income. This is a concept that hasn’t really been tried in the United States but might be worth experimenting.
So is Japan’s past and present our future in the United States? In my opinion the odds are more likely than not that we'll see little or no interest rate increases before the general election in 2016 unless there is a substantial global economic pick up or the Federal Reserve just wants to raise rates to say they did. I don’t see the former scenario playing out but that doesn’t mean they won’t consider the latter.
So the question becomes; “does this mean it’s not worth holding fixed income?” As with every investment decision it all depends on your return expectations, if you plan on holding them until maturity and what is your rationale for purchasing them.
Because interest rates are at historically low yields most investors need to look at fixed income investing as a substitute for holding cash to meet future needs. Instead of maintaining a large cash balance for some planned event, why not build a laddered, barbell or other maturity type bond portfolio based on when you expect the funds to be needed? Maybe before you embark on this type of strategy you should consult with a professional adviser that has the knowledge to guide you through this low interest rate environment.
Whatever course you chart, remember that you should consider as many possible outcomes as you can. Because no one knows the future and rates may increase substantially before we know it!
If you have any questions or comments regarding this blog, please email me at email@example.com and I’ll try and answer your questions…….Thank you.
Tom is the Founder of TRG and has been the President and Chief Investment Officer since 2008.