Shortly after its regularly scheduled meeting regarding Monetary Policy the Open Market Committee of the Federal Reserve, Chaired by Ben Bernanke issued a press release that stated that “the committee decided today to keep the target range for the federal funds [the interest rate at which member banks borrow from each other from the reserves held at the Federal Reserve] at 0 to ¼ percent and currently anticipates that economic conditions – including low rates of resource utilization and a subdued outlook for inflation over the medium run – are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”
This was somewhat of a surprise and tacks on nearly one year from a somewhat recent press release from the Fed which put the end of this accommodative interest rate policy somewhere in mid-2013. The released noted that “while indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment has slowed, and the housing sector remains depressed. Inflation has been subdued in recent months, and longer-term inflation expectations have remained stable.”
Some analysts are cautious regarding the length of time that the Fed will keep interest rates low, concerned that the Fed foresees a slowing of the current pace of economic growth while others believe that this historically accommodative interest rate policy will ultimately fuel inflation. We believe that the truth is somewhere in between as the Federal Funds rate along with market rates will remain low at least through the balance of 2012. After that, the pace of economic activity will determine the direction of interest rates. Why bother predicting interest rates through 2012? The further out you travel in time, the foggier even the Fed’s crystal ball becomes.
What to do now? For those that are borrowing, lock in historically low interest rates now. Refinance your mortgage, refinance your credit cards and if needed, purchase a new automobile at or near zero percent.
For those that have saved, be very wary of longer-dated bonds and bond funds. The best days for bonds are well past. Purchase bonds that will mature in a maximum of eight years. In fact, we might even consider trading in longer-dated maturities for these noted immediately above. Be careful of stretching for income, even in the stock market, in the form of drastically overweighting utilities or consumer staples as dividends will become less attractive should interest rates begin to rise. Along with some allocation to dividend payers, look for investments with secular growth stories such as Nike or Apple Computer.
Finally, be nimble. All recommendations and plans of action are subject to change. The Fed has given you an idea of where they “think” the economy and interest rates are headed. However, the further one projects out there more variables are involved and therefore the more room for error.