GOT FED DREAD? TAKE A CHILL PILL
Sure, it has been 9 years since the last interest rate bump and investors are on edge, but they really shouldn’t be
To raise or not to raise? That’s the question facing the Federal Reserve this week.
But it’s not the question you ought to be asking. The question you should ask is this: Does it really matter whether and when the Fed raises shortterm interest rates from 0.25% to 0.50%?
And the answer is no. Or at least not yet.
Sure, a 25 basis-point increase means that all things money have to be reset. Stocks will become even more volatile. Bond prices will fall. And the interest rate on your home equity loan will likely go up a wee bit.
Big deal. This won’t be the end of the world as we know it. Far from it.
Why? Mostly because we now live in a time that I like to call the New Abnormal.
Consider: The U.S. economy isn’t growing so quickly that the Fed will have to increase rates every time it meets, as it did 17 consecutive times during the early 2000s.
Add other economies into the mix, say China, and it becomes obvious that the Fed will still have to maintain its zero interest-rate policy for a while or run the risk of pushing us back into a recession. And no sitting president wants that to happen on their watch. (Ask Bush 41 if you doubt this.)
Yes, the unemployment rate just fell to 5.1%, the lowest since April 2008. But it’s also true that the labor force participation rate has fallen from 66.2% in 2005 to 62.6% this August. Plus, wage growth averages a tepid 4.2%, compared with the recent historical average of 6.3%.
And lastly, consider that inflation is crazy low — far from the 2% the Fed wants for price stability and maximum employment.
Add that all up and it means this: The sky isn’t about to fall.
Yes, the party is over; we are witnessing the end of the 35year bull market in bonds. But it’s not necessarily the start of a quarter-century bear market for bonds.
You see, the Fed is between a rock and hard place. Sure, the Fed can and will increase shortterm interest rates this month or sometime this year, but it’s not in a position to keep doing it — economic growth doesn’t justify it yet.
And that means you’ll have plenty of time to rejigger — in a prudent and thoughtful manner — your investments, loans and cash. There is absolutely no need to panic.
So, sit back and enjoy the mayhem.
Just don’t get caught up in it.