No getting rid of The Big Easy

From the pages of In Business magazine.

With the appointment and expected Senate confirmation of Janet Yellen as chair of the Federal Reserve, nobody expects the Fed to unwind its “easy money” policy before the announced date of 2015. The real questions are: Will Yellen be an even more aggressive bond buyer than her predecessor, Ben Bernanke, who had hoped to start tapering off by year’s end? And will she have the resolve to tighten the money supply when it’s called for?

Until then, the labor market, particularly the unemployment rate, is where Yellen’s focus will be. If nothing else, that’s because interest rates rose and there was a sell-off in equities when Bernanke announced he would simply consider tapering the “Big Easy,” but it’s also because Yellen is a Keynesian economist. As such, she has faith in the government’s ability to influence the business cycle, and she’s inclined to keep interest rates low even if inflation rises above the Fed’s targets.

Darrell Behnke, Madison market leader of the Private Client Reserve of U.S. Bank, says the consensus view is that the Fed is looking at a couple of things — modest economic growth and the current lack of inflationary pressure. “If you don’t have economic growth and employment isn’t improving and inflation is very modest, it’s hard to see what is going to change that Fed policy,” he stated. “They want to keep interest rates low to fuel the economy.” 

Investors are smart enough to know that easing has to end at some point, but emotion can trump logic, even when it’s clearly time for the Fed chair to tighten the money supply by raising interest rates. In the past, pressure from Wall Street and Washington has convinced Fed chairs to flinch. 



“From an investor’s perspective, many of us have been in an environment where, through much of our investment lifetimes, we’ve enjoyed essentially declining interest rates over that time period,” Behnke noted. “Not every year, but the general theme has been we’ve had declining interest rates, which has led to earning a return on your bonds, your yield, plus some principal appreciation. 

“Once we’re out of this bottoming trend and interest rates start to rise, it’s going to be a difficult environment for many investors to adjust to. Intellectually, you know it, but emotionally it’s a little harder when you see it on a piece of paper.”

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