Why the Fed’s lift-off from Zero is good for savers and long-term investors

Fed funds rate-2By Joe Davis

Special to FindependenceDay.com

Vanguard applauds the Federal Reserve’s decision to raise short-term rates by 25 basis points. It marks the beginning of the normalization for a U.S. economy, which has made considerable progress over the past six years. Very rarely (if ever) have central banks successfully exited the zero bound and quantitative easing; we believe today’s U.S. Federal Reserve will ultimately prove the first to do so.

Dovish tightening cycle expected

We expect a “dovish tightening” cycle that will likely leave the fed funds rate below the rate of trend inflation for at least a year. Specifically, our non-consensus view is that we will likely see an extended pause near 1%, regardless of the near-term outlook. Reasons for an extended pause in the fed funds rate would include slower-than-expected growth—given still-fragile global economic conditions and the self-limiting impacts of further U.S. dollar appreciation—and the need and desire for the Fed to begin tapering the size of its balance sheet.

An unequivocal positive for savers and long-term investors

As this has been a widely anticipated decision, we do not expect any material impact on financial conditions in the short term. Indeed, we view the Federal Reserve’s decision as an unequivocal positive for both long-term investors and for savers.

In our opinion, those who claim that raising rates is a “policy mistake” that may derail the U.S. recovery underappreciate the still-accommodative stance of monetary policy and the resiliency of the U.S. economy. There is little to no empirical support showing a strong and material link between a 25 basis point rate hike and future U.S. economic conditions given the still-negative real fed funds rate.

Low-rate environment is secular, not cyclical

For bond investors who fear a marked rise in long-term U.S. interest rates, we believe that the low-rate environment is secular, rather than cyclical, and that credit risk in bond portfolios may be a more important factor in 2016 than duration or interest-rate risk.

Davis_Joe_10_aJoe Davis is Chief economist and global head of Vanguard Investment Strategy Group. 




Multi-tasking with Financial Podcasts

As any investor is well aware, keeping up with global politics, macro-economics, regional currency fluctuations plus the vagaries of sectors and individual stocks is almost a full-time job. The wealth of digital sources available on the web and through iPads, smart phones and the like is both a blessing and a curse.

Of course, if you’re strictly a purist “index” investor, you can largely ignore the noise as it relates to making individual portfolio adjustments, apart from occasional rebalancing of asset classes. However, based on the feedback MoneySense got from Preet Banerjee’s article on Core and Explore investing, I suspect more investors — even occasional indexers — are much more active in making tactical portfolio adjustments.

Bottom line is most of us need to make some effort to keep up with economic and financial developments around the world. But I’ve found the very ubiquity of information and technology can be harnessed to our advantage, no matter how busy we are. In my own case, I have a commute of almost an hour in each direction, much of it on the subway.

I’ve found that various financial audio (and video) podcasts downloaded to an iPhone (and most other devices) is a useful way to absorb information while commuting or exercising, or even waiting in the many lineups life can subject us to over time. Here’s a rundown of some daily and/or weekly podcasts I find useful:

BBC World Service Global News: This is a handy global affairs roundup of 20 to 30 minutes that is available every 12 hours.

BBC World Business Report: a less frequent podcast of different durations more focused on economics, business and investing.

BBC Documentary Archive: long (25 to 40 minutes) audio documentaries that are indepth on a single topic (a recent one was on Hillary Clinton)

Bloomberg on the Economy:  Usually single-source summaries of between 5 and 20 minutes with various economic and investment experts around the world. Alternative is Bloomberg — All Podcasts.

FT Money Show: Weekly 20-minute podcast from the Financial Times

The Economist All Audio: 7 to 15 minutes most days often on single world political events and occasional financial topics. Those who subscribe to the iPad edition of the Economist can also download audio of the entire weekly magazine: good for absorbing world events on long walks or treadmill sessions!

60 Minutes Podcast: Weekly 45-minute full-audio podcast of the famous TV show.

Jim Cramer’s Mad Money; 45-minutes daily in the week: full video of Cramer’s manic but often insightful take on (primarily) the U.S. stock market. This guy is the “anti-indexer” but does sometimes recommend ETFs outside the US market. He’s been preaching diversification and lately has been positive on both gold (the GLD ETF) and Canada broadly.

Motley Fool Money: Weekly audio show just under 40 minutes: excellent wrap-up of the week’s major events in the U.S. stock market, usually with 3 or 4 guests. Good to listen to while exercising on weekends: most recently I listened to it while grocery shopping!

The Disciplined Investor: Weekly hour-long podcast by Andrew Horowitz, usually with special guests.

NPR Planet Money: 20 minutes or so every few days on quirky topics like “why buying a car is so awful”

The Suze Orman Show: Weekly 45-minute full video of Twitter’s most-followed personal finance guru.

The Dave Ramsey Show; 40 minutes but not having listened to this one yet, can’t comment further.

Mostly Money, Mostly Canadian: 20 to 40 minute occasional podcast by Preet Banerjee and the title aptly sums it up. Various guests, including an appearance by myself.

Financial Post: Various audio podcasts from staff writers from Canada’s daily financial newspaper.