So who looks more right now, President Trump or Federal Reserve Chair Jerome Powell? Based on the market’s reaction to last week’s Fed rate increase, we’d have to say it isn’t Powell.
That doesn’t mean he isn’t right, at least looking at the situation objectively and what Powell is supposed to be doing as Fed chair. While it’s certainly arguable that the Fed does need to take a pause from raising interest rates for a few months to fully digest the recent economic data, which is showing the economy slowing some – but nowhere near a recession – it is right to continue tightening, no matter how unpalatable that is to the market.
Quite frankly, most of the calls for the Fed to refrain from raising interest rates are blatantly self-serving. Of course, investors don’t want the Fed to ever tighten policy, because, as we’ve seen, higher rates mean lower stock prices. Not many people like that, especially when it’s been ingrained in them over the past 10 years that stock prices only go one way – up – and that “buying the dips” is a no-lose strategy to make up for past losses.
Welcome to reality, folks.
It certainly was nice when the federal funds rate was near zero, and the Fed showed no intention of raising it from there, or only raised it by baby steps, making it super cheap for businesses to borrow money, making them more profitable and their stocks pricier.
And it was certainly nice when the Fed was buying about $2 trillion of Treasury bonds and mortgage-backed securities, raising bond prices.
Now, after eight years of this kind of monetary policy, investors don’t like it when it’s time to get back to normal, even if the economy is growing better than it has in years and employment prospects haven’t been this good since the 1970s.
Who knew that the nine-year-old bull market could one day come to an end?
The fact is, investors, want to have it both ways. We want strong economic growth, low unemployment, rock-bottom interest rates, and a non-stop booming stock market, all at the same time.
Well, it doesn’t work that way. The Fed’s mandate doesn’t include making sure investors always make money.
Investors seemed a lot happier when the economy was in the doldrums, barely rising above stall speed for years, with the unemployment rate more than double what it is today. But at least then we had the Fed continually boosting asset prices with zero percent interest rates and endless variations of quantitative easing.
Now we have the opposite happening, and people don’t like it. Although savers and people looking for a job don’t seem to mind.
Everyone knew that the day of reckoning – when the Fed pulled away the proverbial punch bowl – was going to happen eventually. Well, here we are.
Maybe it’s time we all lowered our expectations and accepted that the Great Recession is over and that everything the Fed threw at it has to be stuffed back into its tool chest.
Maybe it’s time that investors – both professionals and retail – have to do a little more homework than they’re used to and seek out those investments that will prosper in this new old normal, rather than stick all their money in an index fund and watch it go up. That strategy ain’t working.
As I approach retirement, I’ve had to get a lot more defensive with my investments, especially given the current investment environment. While putting money into bank certificates of deposit doesn’t carry the same excitement as hitting a home run in the stock market, it may be the right approach right now. Sometimes boring is better.
Savers have been longing for this day. One-year CDs are currently fetching about 2.75%, while two-year CDs are going for 3.0%. That’s a lot better performance than the FAANG stocks. In addition to the FDIC guarantee, CDs also carry a lot of sleep insurance.
I’m not advocating taking all of your money out of the market now – if your portfolio is already down a lot this year, that might be foolish, unless you really can’t sleep at night or need the money in the very near future. But putting about a quarter or a third – even half – of your money into safe CDs for about a year or so seems like a smart idea until the market fully adjusts.
Of course, laddering your CDs, so you always have some dry powder coming due makes even more sense. Allocate your CD money into various tranches – some due in three months, some in six months, etc.
Again, not very exciting maybe, but it could be the right tonic for today.
Wishing everyone a great holiday season and a prosperous new year.
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George Yacik
INO.com Contributor - Fed & Interest Rates
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
Who are you talking to? The majority of retired people and soon-to-be retired don't have enough saved to come even close to a "comfortable" retirement. They should invest their social security in CDs? If you're talking to wealthy retirees are you straying from the principle that they should take no more than 4% from their portfolio each year? And put the money in 2.75% CDs? If your advice is directed at me, I'm not buying it.