
There's something for everyone in this month's message from the Federal Open Market Committee (FOMC), the policymaking body of the US Federal Reserve.
Hawks, doves and neutrals (flightless penguins?) will surely find sufficient language in the two statements the FOMC released on Sept. 17, 2014, following its regularly scheduled two-day meeting to support their respective cases.
(The FOMC released its regular policy statement as well as a statement on policy normalization principles and plans.)
On one hand we have those who expect a rate increase sooner rather than later and of greater magnitude than currently anticipated by market participants.
On another we have investors accustomed to this long-term period of historically low and accommodative monetary policy who can't see it ending anytime soon.
And then there are those who recognize the data-dependent nature of the FOMC's decision-making process.
The bottom line is investors should be wary of making portfolio decisions based on their or anyone else's prognostications about the direction of interest rates.
The FOMC will release its next policy statement on Oct. 31, 2014.
There are many factors at work influencing ups and downs for market rates.
Foreign investors, including Europeans and Japanese, are attracted to risk-free rates of return in the US because official paper in their home countries are below 1 percent. A 1.7-percentage-point yield advantage for benchmark Treasuries over German bunds is the highest since before the euro, in 1998.
The Fed has indeed staked out a policy position tending more toward tightening relative to its European and Japanese peers. The currency impact adds to gains for German and Japanese investors when they repatriate gains on US Treasuries.
This demand will push prices up and pull rates down.
Investors are also seeking the relative safety of fixed-income vehicles backed by the full faith and credit of the US government because of geopolitical uncertainty. Events in East-Central Europe and the Middle East have driven cautious money to Treasuries despite underwhelming economic fundamentals.
Just about all the published speculation leading up to this week's meeting of the Federal Open Market Committee (FOMC) centered on the phrase "considerable time."
Is Janet Yellen's estimate of six months following the end of "quantitative easing" an operative definition? Or would the Fed drop it entirely from its policy statement?
It seems highly likely that the US central bank will end its bond-buying program at its next meeting after announcing another taper to $15 billion in purchases for the month of October. And that's the logical conclusion of a more hawkish stance first enunciated in May 2013.
But the FOMC again used "considerable time" to describe the period between the end of quantitative easing and the first hike to the fed funds target rate since June 30, 2006. It's an open-ended phrasing that leaves hope for an extension of this period of extremely easy money.
At the same time, the FOMC statement reiterated the view that "there remains significant underutilization of labor resources." There was a slight change to the wording on inflation, which now "has been running below the Committee's longer-run objective" versus the view that it had "moved somewhat closer to" target as of July 31, 2014.
These are the data that form part of a broader picture, a longer-term reality of slower growth and lower rates undergirded by powerful demographic factors.
Although the unemployment rate came down to 6.1 percent in August from Great Financial Crisis/Global Recession peak of 10 percent in October 2009, the US added 142,000 new jobs last month, breaking a streak of six straight months of payroll growth of more than 200,000.
The decline in the jobless rate was due to a 64,000-person drop in the labor force to a seasonally adjusted 62.8 percent from 62.9 percent. The participation rate once again tied the lowest level since the late 1970s.
The aging of the Baby Boomers will keep putting downward pressure on the participation rate.
Meanwhile, a globalized labor market is defined by excess capacity, with supply of workers outstripping demand for their services. And real wages have stagnated.
There's growing evidence that the developed-world economies moved into an era of slower growth some time ago. The Global Financial Crisis/Great Recession, a dramatic, relatively short-term event that happens about once a century, obscured this phenomenon.
But the broader context is of an aging and wealthy world, with slowing technology growth and growing income inequality.
The developed world is much older today than in any time in modern economic history due to advances in medicine. People are living longer, raising incentives to save rather than spend, as older folks tend to live off their savings rather than income.
Similar trends are happening across the wealthy world, creating a lot of demand for safe assets like US government debt and pushing down interest rates over time.
But it's not just the aging of the population that we have to contend with, but slowing population growth overall. The slowing of population growth must be considered by companies making investment decisions based on future demand. This dynamic also feeds into lower overall interest rates.
"Slower" is not necessarily bad. In this context it could also mean "steadier," though only time will prove or disprove this point.
But this context is also supports the case for the persistence of historically low nominal and real bond yields.
The point is not that yields won't rise. They will. But ample evidence suggests they won't move all that far all that fast.
But making wholesale portfolio changes based on when and how far interest rates will move is not a sound strategy.
We advocate a certain discipline when it comes to allocating investment funds: Focus on companies with Safety Ratings that fit with your risk tolerance, pay attention to buy under targets, exercise patience, both before establishing positions and after you've bought a business.
The strategy we advocate is to build wealth over time by collecting dividends, benefiting as well from dividend growth and concomitant capital appreciation.
Tactically, we focus on high-quality, easily understood businesses, primarily in essential-service industries, with clearly identifiable cash flows.
When we buy a company we intend to stick with it for the long term, conceiving of ourselves as small business owners, with the type of commitment to stick it out through cycles.
We use the Safety Rating System to establish quality, buy-under targets to establish value.
From time to time we'll take profits off the top of positions, maintaining our original investment, in order to generate funds to establish new positions for diversification purposes or for other uses that suit your particular needs.
It's a "broad front" approach, as opposed to quick, concentrated methods such as day trading, seeking out hot momentum stocks or piling into initial public offerings.
This is no sprint, but a marathon.
This article originally appeared in the Utility & Income column. Never miss an issue. Sign up to receive Utility & Income by email.
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