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Here’s Why Interest Rates Aren’t Going Anywhere, Despite Fed Hikes
From Bill Hall: On Wednesday, the Federal Open Market Committee announced – as expected – its decision to raise the benchmark federal funds rate by .25%, bringing it to .75%.
This marks the third time that the Janet Yellen-led Federal Reserve has hiked rates. Plus, she and her fellow policymakers gave every indication that they’ll continue to raise rates two more times this year and perhaps even four times in 2018.
What’s more – just as I predicted in last week’s article — the mainstream media is making a big deal about the Fed’s decision to move rates higher with headlines like “Interest Rates Set to Skyrocket Over the Next 18 months – Get Ready Now”.
But it’s not going to happen!
In this article, I’ll explain why and how in detail specifically what you should be doing with your money to protect it and profit in the short run.
Sure, the Fed finally raised short-term interest rates after their long-telegraphed decision to do so. But guess what happened to the top-of-the-financial-food chain interest rate, the only rate that really matters, the yield on the 10-year U.S. Treasury?
It went down! Yes, the yield declined from 2.60% to 2.51%… admittedly that’s a decline of only nine basis points, but it’s still a decline. If you don’t know why the 10-year Treasury yield is so important, read my January 6 Money and Markets article where I lay it all out for you.
If you believe rates are headed higher, consider this: Do you think the yield on the 10-year would decline, if the market really expected six or seven .25% increases in the fed funds rate between now and 2018?
Of course not! Let’s do the math: Seven increases of .25% each would mean a cumulative increase of 1.75% (6 increases x .25%). Now add that to the post-Fed-decision level of .75% and you get a fed funds rate at the end of 2018 – that’s just 20 months away – of 2.5%. That’s where the 10-year rate is now!
Wall Street can do this math too, so the market is telling us, that – as I said – it’s not going to happen: intermediate and long term rates are not headed substantially higher. No way are six or seven more rate hikes on the way!
But you can be sure, Janet Yellen and her band of merry men at the Fed will continue to bluster and posture about moving rates higher because it’s the all-important step 5 of the current administration’s 9-step plan that I outlined in my March 3 Money and Markets article to keep the economy and financial markets bumping along.
Specifically, she said the FOMC’s decision sends a “simple message” to consumers that the economy is “doing well.”While I expected that Yellen’s announcement was coming and correctly predicted both the bond and stock market’s reaction, I have to say I was shocked by the hypocrisy in part of Chairman Yellen’s comments.
“We have confidence in the robustness of the economy and its resilience to shocks. It’s performed well over the last several years. We’ve created since the trough in employment after the financial crisis, around 16 million jobs. The unemployment rate has moved way down. And many more people feel optimistic about their prospects in the labor market. There’s job security.”
“We’re operating in an environment where the U.S. economy is performing well. And we seem pretty balanced. So, I think people can feel good about the economic outlook.”
Well, obviously, our Fed Chairman is ignoring the message that’s communicated in this chart from her very own St Louis division of the Federal Reserve.
This chart clearly shows that for the average U.S. worker their share of U.S. GDP has plummeted since the financial recovery.
And that’s despite the trillions of dollars the Fed and the other central banks in the developed world have thrown at the problem as shown in the chart below.
So what does this lower-for-longer interest rate environment mean for the everyday investor?
As I’ve previously pointed out, with the interest rate on the 10-year U.S. Treasury continuing to hover around 2.5%, a portfolio of carefully selected dividend paying growth stocks hedged with a sprinkling of gold and the long-term Treasury ETF TLT remains the best way forward given current conditions.
In his recent, market letter bond-king Bill Gross explains why and his comments are completely in line with my view.
Gross says: “Central banks, including the Fed, are attempting to walk a fine line – generating mild credit growth that matches nominal GDP growth – and keeping the cost of the credit at a yield that is not too high, nor too low, but just right. Janet Yellen is a modern day Goldilocks.”
“How is she doing? So far, so good, I suppose. While the recovery has been weak by historical standards, banks and corporations have recapitalized, job growth has been steady and importantly – at least to the Fed – markets are in record territory, suggesting happier days ahead.”
“But our highly levered financial system is like a truckload of nitro glycerin on a bumpy road. One mistake can set off a credit implosion where holders of stocks, high yield bonds, and yes, subprime mortgages all rush to the bank. It happened in 2008, and central banks were in a position to drastically lower yields and buy trillions of dollars via Quantitative Easing (QE) to prevent a run on the system.”
“Today, central bank flexibility is not what it was back then. Yields globally are near zero and in many cases, negative. Continuing QE programs by central banks are approaching limits as they buy up more and more existing debt, threatening repo markets and the day to day functioning of financial commerce.”
Bill concludes – and I agree – by saying “In this environment, be more concerned about the return of your money than the return on your money.”
The iShares Barclays Aggregate Bond Fund (NYSE:AGG) was trading at $107.81 per share on Friday morning, up $0.15 (+0.14%). Year-to-date, AGG has declined -0.23%, versus a 6.22% rise in the benchmark S&P 500 index during the same period.
AGG currently has an ETF Daily News SMART Grade of B (Buy), and is ranked #6 of 28 ETFs in the Intermediate-Term Bond ETFs category.
This article is brought to you courtesy of Money And Markets.
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