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Published 7:13 am CT Oct. 7, 2018
Where do you begin? Upon what issue (s) do you want to focus? The pace of the news cycle has been so fast one hardly knows which way to look. So, we'll start with the Federal Reserve, which has been raised a lot. In addition, the Federal Open Market Committee projects economic growth will continue to grow, but its median numbers show growth slowing from 3.1 percent in 2018 to 1.8 percent in 2021. (Remember, forecasts, no matter how venerable the source are best guesses and not bedrock.)
Investors were not enthusiastic about the Fed's shares or its expectations, and the onset of United States-China tariffs did not lift their spirits. Ben Levisohn of Barron's Explained:
The Dow Jones Industrial Average dropped 285.19 points, up 1.1 percent to 26.458.31 on the week, while the S & P 500 fell 0.5 percent to 2913.98. Neither could be considered life threatening, and the S & P still rose for a sixth consecutive month. So, while we need something to blame, we need not get too worried. Last Monday kicked off with the implementation of tariffs by the United States and China and a Federal Reserve rate hike. Neither was a surprise, though the Fed might have caught a few words when it removed the word 'accommodative' from its statement.
What does it mean when the Federal Reserve removes the word 'accommodative?' The Fed pursues 'accommodative' or 'easy' monetary policy when it is encouraging economic growth. Accommodative policy may include lowering interest rates or, in unusual circumstances, quantitative easing.
By removing the word, the Fed may be signaling that policy will be 'tightening' in an effort to prevent the economy from overheating, reported Sam Fleming of Financial Times. "Tightening" is Fedspeak for "we are going to raise interest rates." one that will not cause the economy to run too hot or too cold. One must remember that the Fed's movements of lowering or raising interest rates are not an exact science.
In fact, you may be wondering – how does this affect you? If interest rates are rising, then how long can you get back to 6 – 7% CDs or highly rated municipal tax-free bonds paying 5 – 6%? Please remember the Fed banks rate is the interest rate of the banks and credit unions charge to lend balance to other banks and credit unions on an overnight basis. You are a very long way (if ever) from the 1980s when high rates on bonds and CDs were abundant. Though the Fed Funds rate is well raised at 2.25%, it's a better indicator than the 10 year old rate hovering around 3% (and that is locking in for 10 years!)
No, I think it is a tricky path back to high riskless rates of returns. Those of us that continue to search for a safe way to obtain revenue in the 4 – 6% range. Any such new solutions can be found in "good ole days". You might also recall the negative side of the high inflation that existed in the 1980s. While savers had a field day, borrowers paid a horrible price. Stay tuned, yet realistic, while we watch for opportunities emerge from future Federal Reserve stocks.
The opinions expressed in this document are for general information only and are not intended to provide specific advice or recommendations for any individual.
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