Sure, we could write a column that you might find more interesting than what you will find below. However, what the Open Market Committee of the Federal Reserve (FOMC) does or does not do and what the FOMC says or does not say has a profound and lasting impact on the economy and therefore interest rates, stocks and bonds. This past Wednesday the FOMC concluded its two-day meeting and, as they always do, issued a press release, detailing policy action and the rationale behind their decision.
The press release begins on an optimistic note, stating that “information received since the Federal Open Market Committee met in September suggests that economic activity has continued to pick up.” Implied within this statement is the belief by the FOMC that we are at the end of the recession and quite possibly at the beginning of recovery, one which remains somewhat fragile at this time.
The second noteworthy observation by the FOMC, summarizes the financial challenges faced by millions of Americans. “Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.” At this point in time, the Fed appears to be encouraged by the pace at which the economy is recovering from the worst recession in nearly three decades, but wary that the recovery will be one that lasts.
After addressing the challenges faced by consumers, the Fed turns its attention to how businesses are coping with the slowdown. “Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales.” The belief of many is that once the recovery begins, there is the likelihood that the rate of growth will be subpar when compared to past recoveries, hence the wording “bringing inventory stocks into better alignment with sales.”
Finally, the FOMC addresses another concern of many, that due to the expansionist monetary policy, inflation is becoming an issue. “With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.” Two thoughts, one, we believe that inflation will perhaps become an issue down the road. But, two, at this time, we believe that it is a “back-burner item.”
Going into the meeting economists as well as market pundits were concerned with the portion of prior releases that pertained to inflation. For example, after its meeting in September, the Fed concluded that the “Committee expects that inflation will remain subdued for some time.” Some believed that, given the pick-up in economic activity, the words “for some time” would be removed, thus indicating that the Fed would perhaps raise rates sooner rather than later. Obviously, the words “for some time” remained, which, in our opinion, indicates that the Fed has no intentions of raising interest rates any time soon. We believe that given the fragile nature of the recovery, this is wise.
THE BOTTOM LINE – Don’t expect the Fed to raise interest rates any time soon. In fact, rate hikes will most likely not occur until the latter part of the second quarter or even the third quarter of 2010. The result will be a continuation of low interest rates for borrowers, and unfortunately, low interest rates for holders of Certificates of Deposit and Money Market Accounts.
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Commentary for November 30, 2009
Monday, November 30th, 2009There remains continued fallout over the delay in more than $60 billion in debt repayment from United Arab Emirate State, Dubai. At this point in time, the situation looks contained and relatively small compared to the approximate $2.7 trillion that will be written off bank books as a result of the global credit crisis.
That said, this could play out in many different ways. The one that seems most logical is for Abu Dhabi, the seat of the U.A.E. and a country that has 80 billion barrels of oil to help Dubai pay the debt. For that Abu Dhabi will probably seek some Dubai properties as well as a reduction of ties to Iran (which at this time is very tight). Furthermore, there will probably be more oil pumped from Abu Dhabi to generate cash flow in order to come to Dubai’s aid.
On the flip side, should Abu Dhabi stay on the sidelines, the cost of credit insurance and therefore debt service will rise for emerging markets and investors will continue to shift currencies to the U.S. dollar. Time will tell. Stay nimble.
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