The War Goes On
Our Investment Committee has been highly critical of the Fed’s decision to keep interest rates near zero. As we know, the Fed has kept interest rates artificially low by buying an unprecedented amount of bonds on the open market. One of the biggest downfalls of a zero interest rate environment is that seniors and savers can no longer rely on government securities and other ultra-safe investments to generate needed income. Subsequently, they are forced to chase returns in riskier assets in order to pay their bills.
The Federal Open Market Committee (FOMC) meets eight times a year to discuss economic and financial conditions, determine the appropriate stance of monetary policy, and assess the risks to its long-run goals of price stability and sustainable economic growth. After each meeting, the Fed publishes a summary statement, which attempts to justify their current policy. As the Fed’s balance sheet has risen since 2009, the number of words used to explain their actions in the FOMC monthly statement has moved in lockstep. In other words, the more bonds that the Fed buys to keep interest rates artificially low, the more they feel the need to explain themselves to taxpayers. Our Investment Committee still believes that keeping interest rates artificially low will not solve the problems in our economy.
The reality of the situation is that we have no control over the Fed. Investors must accept the monetary policy for what it is and search for ways to profit with the investment tools available to us. Our Investment Committee believes that this zero interest environment will continue through 2016 at the earliest. Investors seeking income must choose between:
- Short-term volatility in dividend-paying equities.
- Government/Corporate bonds with next-to-no income, interest rate risk, and looming inflation risk.
In the coming months, our Investment Committee expects to see more volatility in the market as we come closer towards midterm elections. However, remember that volatility is not always a bad thing. Political uncertainty may cause stocks to sell off, and if it does, our Investment Committee will be using the large cash position to buy stocks that are hit for reasons due to fear and panic in the markets.
Read this week’s Thought of the Week to learn more about the Fed and the zero interest rate environment.
Click Here for the Weekly Thought As an Investment Advisory Representative working in conjunction with Global Financial Private Capital (GFPC) we are provided weekly thoughts on what is happening in the economy and the market. Written by our investment committee at GFPC we find these thoughts to be informative and interesting.