“Tapering Is Not Tightening”
That is the news of the day. What that means is that even though the Federal Reserve is tapering it bond buying and liquidity injection programs, rates are not tightening or rising.
This is a skillfully executed maneuver by the Fed. What it means for fixed income investors is that with low rates here to stay, finding the highest yield and a low rate world is still your best option. Secondary Market Annuities fit that bill perfectly.
High yield fixed income investments like Secondary Market Annuities provide a good rate of return on investment in today’s world, and if midterm lump sum cases are used, future liquidity events in the potentially different rate environment provide options that are not currently available in the market. This is the tried and true laddering strategy, and it just makes sense.
Some recent news on the Fed produced excellent commentary. In Business Insider:
Currently, the Fed’s “forward guidance” consists of an unemployment rate threshold of 6.5% and an inflation rate threshold of 2.5% to help guide monetary policy. In other words, as long as unemployment stays high and prices remain low, the Fed will continue to do what it can to keep rates low.
And, Barrons summarized the day perfectly:
Is it tapering or tightening?
Federal Reserve Chairman Ben Bernanke insisted today’s decision to put the brakes on its $85 billion-a-month bond-buying program is not a sign of tightening monetary policy, adding that “highly accommodative fiscal policy remains appropriate.”
“This is not intended to be a tightening,” Bernanke told reporters during a press conference following today’s Federal Open Market Committee meeting.
Asset purchases will contiinue with ”measured” reductions at future meetings depending on economic dtata, Bernanke said.
The Fed remains committed to keeping short-term interest rates low. Bernanke says the federal fund rate isn’t expected to rise until 2015, Bernanke told reporters at today’s press conference.
However, the FOMC statement cautions that future actions are not on “a preset course.” Bernanke added that the central bank can ramp up quantative easing if needed.
The last sentence is critical. The Federal Reserve indicates that it can ramp up more quantitative easing if needed whenever it wants to. more monetary easing will equate to lower rates long into the future.
The Fed said that “it likely will be appropriate to maintain the current target range for the federal funds rate well past the time” that the jobless rate dips below the 6.5% threshold, “especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal.”
The Fed acknowledged concerns that inflation continues to run stubbornly below the central bank’s 2% target, saying that it is “monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.” The Fed’s preferred inflation gauge, the price index for personal consumption expenditures, increased just 0.7% in October from a year prior, according to a Commerce Department data release earlier this month.