February 22, 2012
Last week the Federal Open Market Committee, the part of The Fed that acts in investment markets to execute monetary policy, released the minutes of their most recent meeting. According to Bloomberg, the participants were divided on key issues. While the Fed noted improved economic data, they are in debate regarding the pace and sustainability of this economic recovery. Some members are open to expanding the balance sheet, which translates into another round of "Quantitative Easing". In my opinion, this only serves to goose equity markets and may lead to widespread inflation later down the road.
This would put more pressure on the consumer and eventually would lead to a slowdown in economic growth. The Fed has stated and Bernanke repeated that they intend to keep interest rates near zero into the end of 2014 (rather than 2013). This means it will continue to be a challenge for our clients who are seeking stable sources of income. With interest rates at historic lows, it is difficult to earn a meaningful yield without taking on an abundance of risk. This may be one of the Fed's intention, as abnormally low yields in bonds and money market instruments force cash to flow into equities (stocks) in order to achieve the investor's desired return. This is not to say that stock ownership is a bad idea, but simply that you can no longer earn 7% from a CD and, now, in order to seek that same return, you have to venture into riskier markets.
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).