Through three doses of quantitative easing the Federal Reserve balance sheet has become extremely bloated; expanding roughly 500% since 2008… Quantitative Easing comes to a close over the next couple of weeks, but this may not be the last we see this program.
Interest rate activity over economic cycles will ebb and flow as the Federal Reserve Board (FRB) attempts to stabilize the economy. During periods of high consumption and demand, the FRB will increase rates to temper buyers. During phases of low consumption and demand, the FRB will lower rates to entice buyers into consumption. Today we sit at 0.0% to 0.25% on the fed funds rate. This expansion would need to continue for an extraordinary period of time in order for rates to elevate to perceived normal levels.
In all likelihood a narrow range of interest rates should be expected in the future as we sit at such low rates today. Assuming rates increase an average of 0.50% per year, we likely will not see rates in excess of 2% by the time they start coming back down.
If rates start falling at or around 2% then we will fall into a cycle of consistently low interest rates again. The FRB will need to utilize methods outside of rate manipulation in order to manage economic activity. The hope would be that between now and the inception of Quantitative Easing 4 that the FRB would have had ample time to unwind the balance sheet it has accumulated over the last 6 years.
There was plenty to celebrate last week as the US and European economies had indicators point towards expansion. The FRB presented a more hawkish view towards policy; which truly projects a much stronger economic landscape. Also, Japan has renewed its efforts towards driving inflationary pressures.
GDP for the 3rd quarter (Q3) was 3.5% annualized[2]. If Q4 can pull off a pace of 3% the 2014 GDP rate would end out at 2.25%. While this rate seems meager, it will be a step forward from the 2.1% average rate that GDP has been unable to break away from. Consumer confidence came in at 94.5 in Sept, up from 89 in August[3]. Spanish GDP was 0.5%, Eurozone consumer price index (CPI, proxy for inflation) increased 0.4%[4].
FRB Chair, Janet Yellen, took a more hawkish view during her press conference last week. This gives the market the indication that while rate decisions are dependent upon ongoing data, that the FRB may raise rates sooner than mid-2015. While it’s immediate impact is negative and will increase volatility the long term indication is that our economy is strengthening.
Japan retail sales increased 2.6% year over year[5]. Also, in an effort to fight the long battle against deflation Japan has committed new funds (unexpectedly) to a bond purchase program.
For more information:
If you would like an in-depth analysis of your current portfolio, please click here.
Always remember that while this is a week in review, this does not trigger or relate to trading activity on your account with Financial Future Services. Broad diversification across several asset classes with a long term holding strategy is the best strategy in any market environment.
Any and all third-party posts or responses to this blog do not reflect the views of the firm and have not been reviewed by the firm for completeness or accuracy.
[1] www.federalreserve.gov monetary policy
[2]www.troweprice.com weekly market wrap-ups
[3] www.mfs.com market outlooks
[4] www.investing.com economic calendar
[5] www.investing.com economic calendar