The FED announced
the continuation of $85bn monthly asset purchases as an improvement in the
housing market and manufacturing helped support the recovery. Since the start of the year, rising
confidence and improved data have pushed equity markets to record levels; however
this is a cautionary tale. There are
still many headwinds facing the U.S economy.
With mortgage rates at extremely low levels (30 year 3.63%!) asset
bubbles can creep up on you quickly. Borrowing
rates, be it Treasuries, Investment Grade or High Yield debt, are extremely low
and one trigger could cause it all to come crashing down.
Whilst Ben
Bernanke has made it clear over the past week that he and the FED remain dovish, it is justifiable that many members of the Federal Open Market
Committee remain wary of the medium to long term implications of such
aggressive monetary policy.
If you remember,
it was not that long ago when inflation rates were over 10%, way off the 3%
currently, and with such high inflation, the main control was raising interest
rates. At this current time, raising the
interest rate could be catastrophic for a number of asset classes; mainly bonds
and cripple any hope of economic recovery.
There are
little signs in the short term of inflationary pressures in the U.S (different
tale for the UK), however TIPS (Treasury Inflation Protected Securities) can
provide you with some protection if you are wary.
Unemployment
is the main focus at the moment and whilst it is reducing, this is not at the
levels seen prior to the credit crisis in 2008.
It is unlikely we will see growth rates like them for a long time,
however progress is progress and it should not be dismissed. Forecasts for 2013 unemployment have been
nudged lower, and monetary stimulus will continue until it reaches around
6.5%.
With record
low mortgages and improving economic conditions in the U.S, it provides a
glimmer of hope of a global economic recovery and we should make hay whilst the
sun doth shine, even if it isn’t that bright…
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