Interest Rates: Why They’re Not Headed Up Anytime Soon
The Federal Reserve has spoken and to no one’s surprise, there was really nothing new from Fed Chair Janet Yellen, who did as was expected after shaving off another $10.0 billion in monthly bond purchases. The Federal Reserve will cut the remaining $15.0 billion in October, bringing its third round of quantitative easing (QE3) to an end.
What the stock market here and around the world also heard was that the Federal Reserve will likely maintain its near-zero interest rate policy for a “considerable time” after the QE3 cuts.
The problem is that the stock market is focusing so much on when interest rates may begin to ratchet higher.
The consensus is calling for rates to move higher by mid-2015, but some feel it will not happen until 2016 if the economic growth stalls. The downward revisions in gross domestic product (GDP) growth around the world could extend the time before the Federal Reserve will raise interest rates.
In the eurozone, the European Central Bank (ECB) is adding more monetary stimulus to jump-start the economy that is faltering due, in part, to the mess in Ukraine.
The news release from the Federal Reserve says the economic growth is moderate but also warns the labor market still has work ahead of it, which appears to be the main focal point.
“To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate,” read the press release by the Federal Reserve. “In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress—both realized and expected—toward its objectives of maximum employment and 2 percent inflation.” (Source: Board of Governors of the Federal Reserve web site, September 17, 2014.)
Maximum employment? Does the Federal Reserve mean full employment? If that’s the case, we’re talking about an unemployment rate of around three percent or so. We are far from that.
Despite the fact that the economy had been producing an average of more than 200,000 jobs monthly, a mere and disappointing 142,000 new jobs were created in August. The unemployment rate fell to 6.1%, but clearly that figure is incorrect, as many who have left the work force aren’t accounted for in this measure.
There are still around 12 million people looking for work, but there are only about three million available jobs—clearly, there’s an imbalance in the jobs market.
Moreover, we have not even talked about the quality of the jobs created as the majority continue to be in lower-paying, low-skilled positions. Jobs for educated college graduates are simply not there.
Based on what I read, the Federal Reserve appears set to maintain historically low interest rates for some time and the stock market will love this. This will give stocks some support going forward and could be enough to make 20,000 a reality for the DOW within a few years.
Given this, if you believe the Fed, you could continue to play the long side via stocks or exchange-traded funds on the S&P 500 and Dow Jones Industrial Average.