~~By George Leong
At the Federal Reserve monthly meeting this past Wednesday, the Federal Reserve reconfirmed its program of maintaining near-zero interest rates and its $85.0 billion monthly bond-buying strategy. As I recently discussed, the environment of low rates will offer little choice for investors who have to weigh low-yielding fixed-income investments against stocks. In other words, the equities market will continue to be driven, at least in part, by the cheap money. This will be great for the people who have the funds, but it will be horrific for those with lower income and who may be dependent on income from their investments. But for the government it’s great news, especially when it’s carrying so much debt—well, the government can thank the Federal Reserve.
Faced with the uncertainties in the jobs market and job creation, the Federal Reserve suggested it would maintain its record-low interest rates until the country’s unemployment rate falls to 6.5%. The problem is that the Federal Reserve predicts this will not occur until sometime in 2015, so that’s another two years of easy money and the building up of massive national debt. Remember what I said about the sequestration cuts and how they are well below the interest paid on the debt? Imagine the payments when interest rates ratchet higher! It’s not going to be pretty. The Federal Reserve has created this situation, which could inevitably blow up.
In reality, achieving an unemployment rate of 6.5% may not happen until after 2015, based on current job generation. According to the Fed’s policy statement, America’s unemployment rate will fall to 7.3%–7.5% this year, 6.7%–7.0% in 2014, and 6.0%–6.5% in 2015. The longer-run projection is 5.2%–6.0%. But there are numerous assumptions, and the numbers don’t include the millions who are not “officially” unemployed.
Moreover, a miscalculation of the situation in the eurozone and China could spoil the recovery and drive the country even more into debt, struggling for a way out.
The Fed said that it will continue to review its bond-buying program and there were some hints that the monthly amount could be cut as the economy strengthens. This may be the first signal of the end to easy money and a warning to stock market investors.
Meanwhile, the House continues to debate on the sequestration budget cuts and revenue sources with very little progress. Then there’s also the national debt limit, which has been surpassed and extended, and it continues to grow. President Obama needs to cut the debt and deficit or face the risk of paying massive interest payments when interest rates edge higher—and they will.
For the time being, buying stocks and dividend-yielding stocks will continue to provide the best investment opportunity, compared to the income from low-yielding bonds.
Now I’m thinking that the Dow hitting 15,000 could be a real possibility, thanks to the Federal Reserve.