|6/12/2014 9:30:00 AM|
The surest bet ever
By Brad BlackburnSince the Financial Crisis, the Fed has blown trillions of dollars performing financial cartwheels in an effort to promote low interest rates. Those contortions include lowering the Fed Funds Rate to zero, three different variations of QE programs (Quantitative Easing), and even something called "Operation Twist." You can certainly question the benefit those trillions of dollars have delivered (like I have dozens of times), but there's no doubt interest rates have been incredibly low. Those low rates led to a never-ending worry for the markets about the inevitable day when the Fed would back away from its stimulus - and rates would rise.
That day came last December, when the Fed announced the gradual slowdown of QE. The result was the surest bet in the history of the world: Interest rates shot up like a rocket! The only problem is - that didn't happen. Rather than rise, the 10-year Treasury yield has fallen nearly 15 percent since the day of the Fed announcement. If there was ever a textbook example that predicting the markets and economy is difficult, this is it.
So what's the explanation for the odd reaction of interest rates? Obviously, there are many answers to that question. The global financial world is incredibly complex, and anyone who says they know all the nuances of it is fooling themselves (or fooling you). However, here's my best shot at it.
The first, most obvious answer is that while the Fed is slowing down QE, the Fed Funds rate is still at zero. Further, the Fed has loudly indicated they'll keep it low for as long as they darn well please. I know what you're thinking: Does that mean the Fed wasted trillions of dollars on their gimmicky QE programs, when they could have simply kept interest rates low? I'm going to leave that question unanswered to create a dramatic effect...
But the Fed isn't the only thing keeping rates low. The crisis in Ukraine is prompting many investors towards the safest investment out there - US government bonds. The more demand there is for those bonds, the lower the interest rate the government has to pay.
Even more importantly, rates are still very low all across the world. In Japan and Europe, policy makers are still enthusiastically stepping on the gas pedal to keep interest rates low. In Europe, they are actually considering negative interest rates on bank accounts (yes, that's a real thing. Can you imagine losing money every month in a savings account?). With interest rates still so low across the world, there's very little upward pressure on rates here in America.
So what's going to happen in the future? The answer is obvious: Rates will rise. It's still the surest bet in the history of the world. In fact, according to a recent Bloomberg study, 100 percent of the economists surveyed expect interest rates to rise over the next 6 months. No, I'm not making that up. As nervous as it makes me to go along with that group, I have to agree. It sure seems more likely for rates to rise than fall. Of course, we all know by now that the predictable thing isn't always what happens. Thank goodness for diversification.
Brad Blackburn, CFP®, is the owner of Blackburn Financial, Registered Investment Advisor. Blackburn Financial is located at 121 Cottage Ave, Cashmere. He can be reached at 509-782-2600 or email him at email@example.com
Article Comment Submission Form