Mark M. Martiak
Managing Director Investments, AIF®

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© 2018 Mark Martiak, AIF®  |Managing Director Investments

Tea Leaves, the Fed and a Burst of Wealth Creation

Ben Bernanke isn’t budging in his support for continued bond buying.  In his semiannual report to Congress Chairman Bernanke exclaimed:

 “Keeping long-term interest rates low has helped spark a recovery in the housing market and has led to increased sales and production of automobiles and other durable goods.”

 

Bernanke then discussed the real reasons why long-term rates have remained so low by explaining that low interest rates are, in fact, a global phenomenon citing Germany, Canada and Japan as comparisons.

 

He went on further to say “Long-term interest rates are the sum of expected inflation, expected real short-term interest rates, and a term premium. Expected inflation has been low and stable, reflecting central bank mandates and credibility as well as considerable resource slack in the major industrial economies. Real interest rates are expected to remain low, reflecting the weakness of the recovery in advanced economies (and possibly some downgrading of longer-term growth prospects as well). This weakness, all else being equal, dictates that monetary policy must remain accommodative if it is to support the recovery and reduce disinflationary risks.”

 

With this explanation, investors can expect lower interest and higher returns for an extended period. However, as the global economy continues its recovery, higher inflation and interest rates should be expected. 

 

Bill Gross, the highly regarded bond expert and a founder of the investment firm Pimco said “the Federal Reserve is buying and there’s no real risk until the Fed declares the war is over. It’s looking for 6.5 percent unemployment.  By any reasonable standard, that’s going to be a long time coming – certainly not in 2013, and probably not for at least two to three more years”.

 

It is household wealth that the Federal Reserve has hoped to buttress with its ongoing program of bond buying.  By purchasing safe bonds, the Fed has nudged investors into risk assets and in turn made those investments appreciate in value.

 

For once, and given the Dow’s all time high of 14,253.77 reached on March 5th, investors don’t need to read the tea leaves to know what the Federal Reserve will do. Fed Chairman Bernanke has made it clear that rates will stay low until at least 2015 and in essence paved the way for investors to get with the program.

 

 

 

 

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