We're a little more than a week into 2015, and already we're seeing some fascinating developments for key story lines we'll be tracking throughout the year.
In fact, Jan. 7, 2015, is shaping up as the pivotal day of the very young year.
On that day, the U.S. Federal Reserve released minutes of the Dec. 16-17 meeting of the Federal Open Market Committee (FOMC), shedding a little more light on the decision-making process that may or may not lead to an interest-rate hike by mid-2015.
Also on Jan. 7 we learned that the Environmental Protection Agency (EPA) will delay the announcement of its rule on carbon emissions from new power plants until mid-summer, aligning the rollout with the introduction of a corresponding but more controversial diktat on emissions from existing facilities.
And that fateful Wednesday brought news on "net neutrality" that may shape the telecommunications industry for years to come.
The consensus expectation is that the Fed will raise the fed funds target off the 0% to 0.25% "zero bound" with a 25 basis point no later than June 18, 2015.
Our base-case scenario for 2015 includes a rate hike by the Fed, though we make no prediction about when, how much or even whether it will happen.
Actually, our hope is that a move off the "zero bound" leads to the type of buying opportunity the "taper tantrum" created in mid-2013.
Even if the Fed raises rates we'll still be at historically low levels for policy rates, and there are myriad factors--including demographics, international demand for risk-free, interest-bearing assets and the probability that we're in a period of slower but perhaps more sustainable global economic growth--that suggest market rates will remain well within the historically low range they've dwelled in for the past half-decade.
This is an issue that will impact the broad universe of high-dividend-paying stocks, including utilities, telecoms, master limited partnerships and real estate investment trusts.
There will be some irrational selling in anticipation of traditional bond investors returning to instruments that may seem to offer newly competitive income streams. But this misperception won't likely endure.
The major conundrum for the Fed is reconciling significant improvement in the labor market since the Great Financial Crisis/Global Recession--2014 was the best year for job creation in the U.S. since 1999--with still-low inflation.
In previous policy statement the Fed has said it will start raising its benchmark rate once the labor market meets certain goals, and those goals have largely been met, and when inflation hits 2%, and that hasn't happened yet.
But recent discussion among FOMC members suggests there will be no hesitation to further normalize monetary policy due to current low inflation.
Lower energy prices and the stronger dollar will likely keep inflation below the Fed's 2% target for some time, but the Fed nevertheless "might begin normalization at a time when core inflation was near current levels."
The Fed, however, "would want to be reasonably confident that inflation will move back toward 2% over time."
Members of the FOMC expressed optimism about the U.S. economic outlook, noting that upside risks "nearly balanced" a relatively gloomy international outlook. Several members noted that the U.S. economy may be growing faster than is currently revealed by real-time data.
At the same time, the minutes provide some context for the FOMC's decision to retain the much-discussed "considerable time" language to describe how long beyond the end of its controversial "quantitative easing" program in October 2014 it will be appropriate to maintain the 0% to 0.25% fed funds target range.
Such language provides the Fed "flexibility" suitable to a "patient" approach that takes account of "incoming information."
There will likely be a similarly misplaced reaction in mid-2015 to the Environmental Protection Agency's (EPA) rollout of rules government carbon emissions from new and existing power generation facilities.
For one thing, the "new" rule will have little impact, as there are basically no plans to build new coal-fired power plants in the U.S.
For another, power generators have been taking steps for years now to bring their facilities into compliance with EPA rules on emissions of sulfur dioxide and nitrogen dioxide that have already led to reductions in carbon output.
There will be some additional costs. But power companies are converting from coal not because of some Obama-led "war" on the fuel but because of a U.S. natural gas boom that's created an abundance of cleaner, almost-as-cheap feedstock for electricity generation.
The short-term impact of the delayed EPA announcement is to prevent--for now--an effort by the Republican-controlled Congress to overturn rules on emissions. A move by the legislature to overturn an administrative action can't be attempted until the rule is final.
The rule on emissions from new plants is only mildly controversial, as there are few if any plans to build new coal-fired power generation facilities.
The rule covering existing plants is a different animal. Both face considerable opposition from the energy and utility industries as well as from states that must implement plans based on local considerations.
A number of states have already sued the EPA over the proposals, presaging a lengthy legal battle that will likely find its way to the Supreme Court.
The top U.S. communications regulator on Wednesday endorsed the regulatory standard applied to telephone companies in remarks seen as the strongest indication yet that he planned to side with President Barack Obama on strict "net neutrality" rules.
Comments by Federal Communications Commission Chairman Tom Wheeler at the Consumer Electronics Show in Las Vegas on Jan. 7 appeared to indicate a shift in his position on regulating Internet service providers (ISP) more strictly under Title II of the U.S. communications law, aligning him with statements made in late 2014 by President Obama.
The FCC has been working for nearly a year on new rules governing how ISPs manage Internet traffic on their networks, and Mr. Wheeler said he will share his latest proposal with fellow commissioners on Feb. 5 and hold the vote on final regulations on Feb. 26.
At stake is whether and how ISPs should be banned from blocking or slowing down websites and applications and from charging content companies for "prioritized" downloads.
According to Mr. Wheeler, "We're going to propose rules that say that no blocking, no throttling, no paid prioritization."
The FCC last year received some 4 million comments after Mr. Wheeler's original proposal left the door open to "commercially reasonable" discrimination.
In November Mr. Obama gave net neutrality advocates a boost, calling for strictest rules possible and suggesting the FCC reclassify ISPs as more heavily regulated "telecommunications services," instead of the current "information services."
ISPs say they don't object to parts of Mr. Obama's plan but staunchly oppose reclassification, which they say will present a regulatory burden and impede investments and innovation. They are expected to mount a court challenge, and Republicans are expected to counter new rules with legislation.
It's likely that "the just and reasonable standard," like the EPA's proposals on carbon emissions, will lead to litigation.
On the other hand, Fed action this year could create the next buying opportunity for essential-service and other high-dividend-paying stocks.
This article originally appeared in the Utility & Income column. Never miss an issue. Sign up to receive Utility & Income by email.
Source: Bloomberg New Energy Finance
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