Making Cents

January 2010 Monthly Economic Update

Posted by Curtis A. Smith, CFP® on 2 February 2010 | 0 Comments

Tags: Economic, Core Series, Investing, Financial Planning, Foreign Stocks, Commodities, Interest Rates, Federal Reserve, Housing

 

The month in brief. Wall Street had an eye on Washington for much of last month. Anticipation of earnings season gave way to concern over what might happen if proposed limits on bank risk went into effect, and what might happen if federal tax credits in the housing market went away. Stock and commodities markets fared poorly as some economic data led traders, economists and investors to wonder how much of the recession recovery was attributable to government measures. Still, consumer confidence was on the rise and the economy was clearly on the mend.

Domestic economic health. Some very good news arrived in January: according to the Commerce Department, the preliminary 4Q GDP reading was +5.7%, the best quarter in six years and 1.0% higher than the expectations of analysts. Consumer spending represented 2.0% of the gain. Additionally, the Conference Board’s survey of consumer confidence hit a two-year high last month.(source) The University of Michigan consumer sentiment poll rose by 1.6 points to 74.4.(source) The latest consumer spending data showed a 0.2% gain for December. January also brought the best news on factory output in five years – the Institute for Supply Management’s manufacturing index read 58.4 for the month.(source)

Other news items bothered the Street. In late January, President Obama rolled out a proposal he referred to as “the Volcker rule”. Developed with input from former Federal Reserve chairman Paul Volcker and former SEC chair William Donaldson, the rule would prohibit banks and bank holding firms from getting involved in hedge funds or conducting proprietary trading operations.(source) Intended as a corrective to the behavior of the 2000s, the proposed limits on bank size and bank risk sent stocks skidding, as investors saw reduced potential for bank profits. Tightening in China, debt problems in Greece and a downgrade of the U.K.’s banking system didn’t help the mood.

In terms of rates we all watch, things stayed pretty much the same: the benchmark interest rate remained between 0-0.25% after the latest Federal Open Market Committee meeting, and the Senate reconfirmed Ben Bernanke as Fed chair. We learned that the jobless rate stayed flat in December at 10.0%.(source) The inflation rate (CPI) had inched north 0.1% for December, up 2.7% over the last 12 months with core CPI rising 1.8% in that stretch.(source)

A previously obscure Massachusetts state senator became a person of influence on Capitol Hill. The unexpected election of Sen. Scott Brown (R-MA) effectively derailed passage of the Obama administration’s seemingly assured healthcare reforms. White House press secretary Robert Gibbs claimed that the health care reform bill was still “inside the five-yard line.” There were signals that health insurance reform might be the new tack.(source) This was great news during January!

Global economic health. Concerned about an overheated economy, China told its commercial banks to boost capital ratios; that led to the worst market day in Asia since early November, and it was the first in a series of cautions from the government.(source) China’s GDP was +10.7% in 4Q 2009 with December showing amazing annualized gains in industrial output (+18.5%) and retail sales (+17.5%).(source) The Bank of Japan forecast moderate improvement for that nation’s economy; Japan’s jobless rate fell to 5.1% in December, and its vehicle sales went north in January for the sixth consecutive month.(source)

In Europe, the government of Greece wrestled with a $75 billion budget deficit. Standard and Poor’s took the United Kingdom’s banking system off of its global list of “most stable and low-risk” banking systems.(source) Yet Eurozone consumer confidence increased for the tenth consecutive month in January, even as the latest figures showed unemployment had reached 10.0% for November.(source)(source)

World financial markets. Indices in a few of the BRIC nations posted gains last month. Venezuela’s Caracas General pulled off a 7.7% increase, and Russia’s RTSI rose 3.3%; the Jakarta Composite in Indonesia gained 3.0%. (The world’s best performing index was the CASE 30 in Egypt, which rose 7.8% last month.) Most world indices took monthly losses, as follows: Hang Seng, -8.0%; Shanghai Composite, -8.8%; Sensex, -6.3%; All Ordinaries, -5.9%; Nikkei 225, -3.3%; STOXX 600, -2.4%; DAX, -5.9%; CAC 40, -5.0%; FTSE 100, -4.1%. The MSCI World Index fell 3.67% in local currency terms; the MSCI Emerging Markets index lost 4.47% in January.(source)(source)(source)

Commodities markets. Most commodities struggled on the NYMEX last month. Three posted January gains of 5% or better: coal, +8.31%; sugar, +9.80%; orange juice, +5.46%. Platinum prices went up 3.15% and palladium prices gained 0.93%. Gold lost 1.20%, silver 3.89% and copper 8.79%. Gold ended the month at $1,083.00 per ounce. Crude oil, which finished January at $72.89 per barrel, lost 8.15% for the month. Crops were hit hardest, with soybeans down 12.83%, wheat down 12.47%, corn down 13.99% and oats down 17.69%. The U.S. Dollar Index gained 2.07% last month.(source)

Housing & interest rates. What would happen with the housing market without federal subsidies in place? The latest new and existing home sales figures made analysts wonder. Purchases of existing homes fell by 16.7% while new home purchases dipped 7.6%; both figures reflected the assumption that government tax credits were expiring.(source) Construction spending slipped 1.2% in December.(source) On the bright side, National Association of Realtors tallies put existing home sales for 2009 approximately 5% above levels of 2008.(source)

What about mortgage rates? Did 30-year FRMs manage to average under 5% for another month? The answer is yes. On January 28, Freddie Mac tracked average interest rates on 30-year FRMs at 4.98%. Rates on 15-year FRMs were averaging 4.39%, rates on 5-year hybrid ARMs were averaging 4.25% and rates on 1-year ARMs averaged 4.29%.(source)

Major indexes. January brought some chills to Wall Street, with the proposed “Volcker rule” and concerns about financial pressures in China, England and Greece affecting the three marquee indices.

 

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Managing Inflation Risk

Posted by Curtis A. Smith, CFP® on 22 January 2010 | 0 Comments

Tags: Inflation, Hedging, Total Return Strategies, TIPS, commodities, financial planning, investing, core series, economic

As the capital markets have improved, more investors have shifted their concern from weathering the financial crisis to anticipating the inflationary effects of rising federal spending and debt. Many people are asking how they can prepare for potentially higher inflation. This blog post explores two basic ways to address inflation uncertainty and highlights asset groups that may prove useful.

As you consider strategies, remember the difference between expected and unexpected inflation. Asset prices already reflect the market’s expectations about future inflation, given all available information. Inflation may turn out to be worse than expected, and this risk of unexpected inflation is what some investors may want to manage.

Hedging vs. Total Return Strategies

Investors can prepare for unexpected inflation by following one of two basic strategies—hedging the immediate effects of inflation or earning a total return outpacing inflation over time.

Hedging involves choosing assets whose value tends to rise with inflation. Although holding these assets may reduce the total return of a portfolio, the positive correlation with inflation can help an investor keep up with rising consumer prices, at least over the short term. (Correlation refers to the co-movement of asset returns. When two assets are positively correlated, their returns tend to move together; when negatively correlated, their returns are dissimilar.)

Candidates for hedging include retirees, fixed income investors, and others who would experience a diminished living standard during an inflationary period. These investors are willing to forfeit long-term growth potential for more immediate inflation protection.

In a total return strategy, an investor attempts to outpace inflation by holding assets that are expected to earn higher real (inflation-adjusted) returns. This investor is willing to give up short-term inflation protection for an opportunity to grow real wealth. Younger investors are typically well suited for this strategy because they have many years until retirement and expect their earnings to advance faster than the inflation rate. As they save and invest for the future, they can accept more risk through greater exposure to higher-return assets, such as stocks.

To insulate a portfolio from unexpected inflation risk, both strategies may employ some combination of stocks, short-term fixed income, and Treasury Inflation-Protected Securities (TIPS). Let’s consider each of these:

Stocks

Equity securities have provided a positive inflation-adjusted return over the long term. From 1926 through 2008, the total US stock market, as measured by the CRSP 1-10 Index, outpaced inflation by an average of 6.16% per year. (see end notes) To achieve this higher expected real return in stocks, however, an investor had to accept more risk, as measured by greater volatility in returns, and endure periods when stocks did not outpace inflation. As a result, stocks may be less effective for hedging short-term inflation and more suitable for investors who want to beat long-term inflation by earning a higher total return.

Some investors assume that high inflation leads to lower stock market performance, while low inflation fuels higher stock returns. In reality, inflation is just one of many factors driving stock performance. US market history since 1926 shows that nominal annual stock returns are unrelated to inflation.

Fixed Income (Bonds)

Higher inflation can hurt bondholders in two ways—through falling bond market values triggered by rising interest rates, and through erosion in the real value of interest payments and principal at maturity. This inflation exposure tends to impact the prices of long-term bonds more than those of short-term bonds, and investors can mitigate the effects of rising interest rates by holding shorter-term instruments.

Many types of investors may benefit from holding short-term bonds. When interest rates are climbing, a portfolio with shorter-term maturities enables an investor to more frequently roll over principal at a higher interest rate. This can help inflation-sensitive investors keep up with short-term inflation and enable total return investors to reduce portfolio volatility, which can lead to higher compounded returns and growth of real wealth.

Treasury Inflation-Protected Securities (TIPS)

Issued by the US government, TIPS are fixed income securities whose principal is adjusted to reflect changes in the Consumer Price Index (CPI). When the CPI rises, the principal increases, which results in higher interest payments. At maturity, an investor receives the greater of the inflation-adjusted or original principal. The inflation provision enables TIPS to preserve real purchasing power and hedge against unexpected inflation.

TIPS are generally a good short-term inflation hedge since principal is adjusted for changes in the CPI. They are also a good portfolio diversifier for some long-term investors due to their negative correlation with equities and relatively low correlation with most types of fixed income assets. TIPS were introduced in 1997, so these correlations are based on a relatively short sample period.

However, keep in mind TIPS prices have also have been affected by changes in real interest rates, so TIPS may not track inflation one-to-one in the short term or over longer periods of time. In fact, TIPS can lose market value if real interest rates increase.

Commodities

Commodity futures, as well as gold and oil, are perceived as effective inflation hedges because their returns are positively correlated with inflation. But commodities are more volatile than stocks, and their returns do not always rise with inflation because of this significant volatility. So adding these assets to a portfolio may increase real return volatility, which could offset the benefits of hedging.

Investors should also consider the economic argument against holding commodities. Unlike stocks, commodity futures do not generate earnings or create business value. They are essentially a speculative bet in which there is a winner and loser at the end of each trade. Moreover, a broad-based stock portfolio already has significant commodity exposure through ownership of companies involved in energy, mining, agriculture, natural resources, and refined products.

Summary

While the media have featured divergent opinions and theories about the effects of recent government actions on inflation, no one really knows how consumer prices will respond to the complex forces at work in the economy and markets. Investors should carefully review their financial circumstances and investment goals before making changes to their portfolio.

As you assess your exposure to a high-inflation scenario and form a strategy that reflects your financial goals and risk tolerance, consider that:

•    Expected inflation is built into asset prices. In our view, markets efficiently integrate all known information into prices. Thus, current prices already reflect expectations of future inflation. Only unexpected news will affect the inflation outlook.

•    Hedging unexpected inflation has a cost. Investments traditionally regarded as effective short-term inflation hedges have lower historical returns than stocks—and some have much higher volatility.

•    Volatility matters. Evaluating assets solely on their ability to track inflation disregards the effect of volatility on returns and risk. Some assets that are positively correlated with inflation have large return variances, and adding these to a stock and bond portfolio may increase overall volatility.

Even with the prospect for higher inflation, investors who take a total return approach may be better served than those who choose assets based on correlation with the CPI. By choosing assets with higher expected long-term returns and maintaining broad diversification, investors can seek to grow real wealth and preserve the purchasing power of their dollars.

Complimentary related commentary include this Money Cents Newsletter article:
 
Managing Asset Allocation in Your Investment Portfolio 
 
Endnotes
Real return calculation:  (1+CRSP 1-10 Index return)/(1 + US CPI)-1. The CRSP 1-10 Index is a market capitalization weighted index of all stocks listed on the NYSE, Amex, NASDAQ, and NYSE Arca stock exchanges. CRSP data provided by the Center for Research in Security Prices, University of Chicago.

Disclosures
Inflation is typically defined as the change in the non-seasonally adjusted, all-items Consumer Price Index (CPI) for all urban consumers. CPI data are available from the US Bureau of Labor Statistics.

Stock is the capital raised by a corporation through the issue of shares entitling holders to an ownership interest of the corporation. Treasury securities are negotiable debt issued by the United States Department of the Treasury. They are backed by the government’s full faith and credit and are exempt from state and local taxes.

CRSP is a non-profit center that also functions as a vendor of historical data. CRSP end-of-day historical data covers roughly 26,500 stocks, both active and inactive. OTC bulletin board stocks are not included.

The indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results, and there is always the risk that an investor may lose money.

Diversification neither assures a profit nor guarantees against loss in a declining market.

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THE DCA Way

Posted by Curtis A. Smith, CFP® on 30 December 2009 | 0 Comments

Tags: Dollar Cost Averaging, Core Series, Spending Plan, Cash Management, Financial Planning, Investing, Retirement Plan Contributions

Are you investing inconsistently … or not at all? Inconsistent investment can sabotage your retirement savings efforts. There’s a way to avoid that problem: a strategy called Dollar Cost Averaging (DCA).

By investing equal dollar amounts on a regular monthly basis, you can plan to build wealth in a way you can afford today.

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Tax Alert: Plan to Take Advantage of 2010

Posted by Curtis A. Smith, CFP® on 28 December 2009 | 0 Comments

Tags: Itemized Deductions, Standard Deduction, Alternative Minimum Tax, Marginal Tax Rates, Income Tax, Financial Planning, Core Series, Estate Tax

Do you see a warning light flashing? Americans with high net worth and high incomes are preparing for the likelihood of higher taxes in 2011 and subsequent years. High earners are almost certainly going to take the hit if the EGTRRA and JGTRRA cuts fade away at the end of 2010. Here’s a summary of what’s happening – and a look at what might happen. There are some developments you will want to remember, and some tax breaks you might very well want to exploit.

No phaseouts on itemized deductions and personal exemptions in 2010. This may provide you with an opportunity for some notable tax savings. Historically, high-income taxpayers have been subject to a reduction in the value of itemized deductions and personal exemptions. That has gradually decreased in this decade. In 2010, the phaseouts are gone entirely. In 2011, they are poised to return.(source)

As IRS standard deduction and personal exemption amounts are indexed to inflation, you’ll see very little change there for 2010. The standard deduction for heads of household will rise by $50 to $8,400 for the 2010 tax year. Other standard deductions will stay put, and the personal exemption amount will remain at $3,650 for 2010.(source)

Lower long-term capital gains rates through 2010. Unless Congress decides to extend these Bush-era cuts, capital gains tax rates will revert to pre-2003 levels in 2011. For 2010, the long-term capital gains rate for those in the 10% and 15% tax brackets is 0%. In 2011, it is set to go to 10%. If you fall into the 25%, 28%, 33% or 35% tax brackets, the capital gains rate is 15% in 2010 and 20% in 2011.(source)

The Tax Extenders Act of 2009. The House passed this legislation on December 9, and the Senate is likely to follow suit. The final version of this bill would likely extend the additional standard deduction for real property taxes, the deduction for state and local sales tax, and deductions for tuition/education expenses and teachers' classroom expenses into 2010.(source)

The estate tax. 0% estate taxes in 2010? That was the plan … but the reality is that estate taxes are likely to remain at current levels in 2010 with some retroactive lawmaking. In early December, the House voted to restore the estate tax for 2010; a week later, the Senate voted against temporarily extending 2009 estate tax levels into the coming year. The Senate will almost certainly take up the issue again in January. However, to prevent a complete repeal of the estate tax next year, any new legislation is expected to contain a retroactive provision. So instead of taking effect upon passage, any new estate tax law would likely be made retroactive to January 1, 2010.(source)

The AMT (Alternative Minumum Tax). You know how it works – Congress comes up with another AMT patch at the stroke of midnight and middle-class taxpayers are saved once more. Well, just to make things interesting, the Tax Extenders Act of 2009 doesn’t include an AMT patch for 2010. Many tax professionals think the 2010 patch issue will be addressed early next year, with the patch for the 2010 tax year made retroactive.(source)

How will marginal tax rates rise in 2011? Does anyone think taxes won’t increase in the near future? At present, the marginal tax rates are 10%, 15%, 25%, 28%, 33% and 35%. If Congress doesn’t act by the end of 2010, the tax brackets will reset to 15%, 28%, 31%, 36% and 39.6%. By the way, President Obama and some Democrats have proposed future tax brackets of 10%, 15%, 25%, 28%, 36% and 39.6% for 2011 (that is, only the highest two brackets would revert to pre-EGGTRA levels).(source)

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November 2009 Monthly Economic Update

Posted by Curtis A. Smith, CFP® on 8 December 2009 | 0 Comments

Tags: Economic, Core Series, Financial Planning, Investing, Commodities, Foreign Markets

The month in brief. The Dow climbed 6.51% in November, and the S&P 500 and NASDAQ were nearly as hot.(source) Gold prices reached new highs, and home sales numbers were impressive. A recovery appeared certifiably underway, albeit the kind that featured an occasional step back. A debt crisis in Dubai only rattled stocks momentarily. Data showed consumer spending increasing, and Black Friday wasn’t bleak. 

Domestic economic health. Has unemployment peaked? The jobless rate came down to 10.0% in November from October’s 10.2% mark. As for next year, Federal Reserve policymakers predicted unemployment of 9.3-9.7% by 4Q 2010 – better, but hardly a forecast to celebrate. However, the great news in the November jobless stats; payrolls only contracted by 11,000 positions – the economy seemed on the verge of creating jobs again.(source)(source) Time will tell on employment gains.

The recovery was progressing, in fits and starts. We learned that consumer spending increased by 0.7% and wages increased by 0.2% in October.(source) The Black Friday weekend was solid, if not spectacular; National Retail Federation research gauged online and brick-and-mortar retail traffic at 195 million versus 2008’s 172 million. However, the average shopper spent $343.31 this Thanksgiving weekend compared to $372.57 a year ago.(source)

Turning to services and manufacturing, factory orders increased in October for the sixth month out of seven (+0.6%) while October durable goods orders fell (-0.6%).(source) The Institute for Supply Management’s November service sector index showed contraction (48.7 as opposed to a 50.6 reading in October) and its manufacturing index slipped from October’s 55.7 mark to 53.6 last month – still showing growth.(source)

After October declines, the two notable consumer confidence indexes presented a mixed bag: the Conference Board index went to 49.5 in November from 48.7 in October, but the Reuters/University of Michigan survey finalized at 67.4 for the month, down from 70.6 in October.(source)(source) We learned consumer prices had risen 0.3% in October, with core CPI +0.2%; the last figure put core CPI at +1.7% for the past 12 months of data, squarely within the Federal Reserve’s inflation target zone.(source)

Global economic health. All kinds of 3Q data were now available. Perhaps the cheeriest news was the Eurozone economy grew by 0.4% in the third quarter – the first positive quarter in the last six. German’s economy grew by 0.7%. Out of the major European economies, only the United Kingdom and Spain remained in recession.(source)(source) The Bundesbank, Germany’s central bank, forecast GDP of +1.6% for 2010 and +1.2% for 2011 after a -4.9% showing for 2009.(source)

Aided by a government stimulus and $1.3 trillion in loans, China’s economy expanded by a record 8.9% in the third quarter.(source) While data arrived showing Japan’s economy posting its second straight quarter of growth, the International Monetary Fund estimated the nation’s GDP would shrink by 5.4% for 2009.(source) Turning to the third and fourth largest economies in Asia, India’s economy grew by 7.9% for the third quarter, while South Korea’s economy grew by 3.2%.(source)(source)

World financial markets. The DAX led the way among major European indices with a 5.0% November gain. England’s FTSE 100 climbed 4.0% and France’s CAC 40 rose 3.2%. Among European indices of note, only the ISEQ (Ireland) posted a November loss. Turning to the Pacific, the Shanghai Composite went +3.4% while Hong Kong’s Hang Seng was -2.8% last month. The Singapore STRAITS Times was up 4.2%. The Australian All-Ordinaries took a 1.1% November loss. It was not a good month for the Nikkei 225, which dropped 9.5%. Eyeing emerging markets, Brazil’s Bovespa had the hottest month of any notable index (+9.0%). India’s Sensex was +4.6% as the month drew to a close, and Russia’s RTS was up 8.3% (and more than 130% YTD).(source) The MSCI World Index gained 2.88% last month, earning a +18.57% YTD mark. The MSCI Emerging Markets Index gained 3.24%, leaving it up +52.48% YTD.(source)

Commodities markets. When November ended, gold had settled at $1,181.10 per ounce (on its way to $1,200 in early December). The precious metal gained a jaw-dropping 13.60% ($141.40 per ounce) in November, its biggest monthly dollar gain since 1980. On November 30, gold was +33.67% YTD with a 24.10% cumulative gain across September, October and November. Copper gained 6.82% last month, bringing it to +125.70% YTD. Silver ended November +62.99% YTD, platinum +55.47% YTD and palladium +98.37% YTD. Oil prices rose $0.28 in November to $77.28 per barrel, which left oil +73.27% for 2009 YTD. At November’s end, oil prices had risen 11.27% across the last four months.(source) These returns may be the result of domestic political uncertainity. Do you think so?

Looking at farm commodities, wheat prices rose nearly 25% during the month and orange juice prices rose nearly 29%. Among notable ag futures, only cattle and sugar finished negative for the month.(source)

Housing & interest rates. With buyers rushing to qualify for potentially expiring tax credits and mortgage rates at or near record lows, the residential real estate market heated up. A rush of buyers in the South put new home sales at +6.2% for October, while existing home sales leapt north by 10.1%.(source) On the downside, housing starts dropped 10.6% in October to the lowest level since April.23 On the upside, pending home sales rose again: +3.7% in October, 32% above levels a year before.(source)

Interest rates on 30-year FRMs moved even lower. On November 25, Freddie Mac’s weekly survey had the national average at 4.78%, matching the record low set in April. Interest rates on 15-year FRMs were averaging 4.29%, 5/1-year ARMs 4.18%, and 1-year ARMs 4.35% at that date.(source)

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Breaking Bad Money Habits

Posted by ICMC Staff on 30 November 2009 | 0 Comments

Tags: Spending Plan, Needs, Desires, Good Debt, Bad Debt, Core Series

Many of us plan thoughtfully for all kinds of life goals. Yet many of us spend impulsively, using our money on the moment rather than saving or investing it for the future.

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When Will Interest Rates Rise?

Posted by Curtis A. Smith,CFP® on 19 November 2009 | 0 Comments

Tags: Federal Reserve, Interest Rates, Economic, Core Series, Inflation, Deflation

How long can the federal funds rate stay so low? The Federal Reserve has publicly stated that it will keep the federal funds rate between 0% and 0.25% for an “extended period”. Many economists don’t see the Fed raising rates until well into 2010. Yet rates will move north someday. How soon might that happen? And how could the Fed delicately move rates north without hampering the recovery?

In a post on Morningstar Advisor Market Blog, I opined concerning how the Great Recession might conclude. Inflation, deflation, and interest rates all interact in this scenario. This post addresses the issues surrounding the root causes of inflation, the delimma facing the Federal Reserve on interest rates going forward, while providing historical context. This is a good preliminary read as you evaluate your business decisions and investment allocation for 2010 and the years beyond.

The Barron’s argument. On October 19, Barron’s published a piece titled “C’mon, Ben!” in which senior editor Andrew Bary called for short-term interest rates of 2.0%. Why? “Super-low short rates are fueling financial speculation, angering our economic partners and foreign creditors, and potentially stoking inflation.” One concern is that by keeping rates so low for so long, the Fed might risk an asset bubble – recall how the housing bubble was aided by low interest rates. The article called for the Fed to exit the crisis mode policy of the last 12-18 months.(source) 

What would raising short-term interest rates to 2% possibly accomplish? Well, the tactic could prove a decisive and wise move to control inflation (CPI is on track to come in at 2% for 2009, so Bary argues that inflation is indeed back) and aid the dollar.(source) The downside, of course, is that the move would amount to a right cross to the jaw for the stock market (and possibly the commodities markets).

The challenge for the Fed. The stock market is having a great year; the economy is not, with unemployment north of 10% and the business and real estate sectors taking a long time to recover. Given this, most economists and market analysts see no incentive for the Fed to make a move. (In fact, St. Louis Fed President James Bullard has cited “jobs growth and unemployment coming down” as a “prerequisite” for increasing interest rates.) (source) The challenge for the Fed is how to signal or hint at a move in the coming quarters in a way that seems reasonable or non-disruptive to the recovery.

There are possible hints of inflation here and abroad (renewed strength in emerging market economies, gold prices soaring and the dollar hurting). On October 22, Philadelphia Fed President Charles Plosser told Bloomberg Radio that he felt the time to raise rates would come sooner than most Fed officials believed. The next day, a Bloomberg data survey showed that traders had increased the probability of a federal funds rate hike in 1Q 2010 to 48% from 37% the day before.(source)

The prevailing notion. TheStreet.com published a rebuttal of sorts to the Barron’s article – a piece titled “It’s Absolutely Not Time to Raise Rates, Ben!” in which author Ron Insana argued that the recovery was too fragile to prompt any notion of raising the federal funds rate. Many analysts feel that a rate increase is simply unwarranted without a demonstrably healthier job market, housing market and banking system.

Out west, San Francisco Fed President Janet Yellen told reporters that she didn’t anticipate a rate increase or any tightening of the Fed’s rescue programs in the next several months.(source) So the question remains “when” – and the Fed must move as carefully as ever.

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Monthly Economic Update October, 2009

Posted by Curtis on 4 November 2009 | 0 Comments

Tags: Economic, Financial Planning, Investments, Core Series