Vail Daily column: Fed makes bold move
December 17, 2012
Markets appeared to be in a holding pattern last week as traders await a fiscal cliff deal. Equities finished the week slightly in the red, pushed down by fresh concerns that lawmakers may not reach a deal this year. For the week, the S&P slid 0.32 percent, the Nasdaq trimmed 0.23 percent, and the Dow slipped 0.15 percent. Despite ongoing talks, no fiscal cliff resolution is imminent. While Congress had expected to recess last Friday, lawmakers are delaying their holiday break to see the process through and may stay until Christmas, if necessary. In a new twist, sources close to the talks say that House Speaker John Boehner has offered up tax increases on incomes above $1 million as part of a deficit reduction deal to move negotiations forward. In exchange, Republicans want tax cuts extended for all incomes under that amount, as well as spending cuts to entitlement programs. While we don’t know if a deal is around the corner, this shift toward compromise on both sides is an important breakthrough.Last week, the Fed made a huge, game-changing step towards adopting a more aggressive, expectations based monetary policy. On Wednesday, the FOMC announced QE4, promising to buy $45 billion in longer-term Treasuries on top of its monthly purchase of $40 billion in mortgage-backed securities. In an unprecedented move, the Fed also announced that it will keep interest rates low until unemployment falls to at least 6.5 percent, as long as inflation remains below 2.5 percent. Tying monetary policy to specific guideposts is a fundamental shift in the way the Fed does business and moves it much closer to fiscal policy. We have hopes that this bold move will entice business leaders to move some of their cash stockpiles off of the sidelines and into the markets, giving the economy a much-needed boost. At the same time though, we’re concerned about how the Fed will ever be able to disengage (by selling off bonds) from this massive purchasing program without sending markets into a decline. Only time will tell the whole story. Next week analysts will be watching the release of GDP and unemployment numbers and waiting hopefully for more news from Washington.On a final note, we feel compelled to acknowledge the tragic loss faced by the families of Newtown, Connecticut. Our hearts go out to the community who unjustly lost 26 precious lives. Though words cannot express the pain they are facing, may we at least be reminded how important it is to cherish our friends and family members with every moment we have.Headlines• China promises to maintain prudent monetary policy in 2013. China’s new Communist Party leaders reiterated their intention to closely monitor the country’s still-fragile economy in case more policy easing is required. Although China’s economy is recovering, weaker-than-expected November data indicates it’s not out of the woods yet. • U.S. factory output jumps in November. Manufacturing rebounded from Superstorm Sandy by posting its largest monthly increase – 1.1% – in a year. Strong auto production largely drove the gain, reigniting hope for the domestic economic recovery. • Holiday retail shopping takes off. Despite worries about the effects of Superstorm Sandy and the fiscal cliff, retail sales rose 0.3% between October and November, driven by lower gas prices and a steady job market. However, with a decline in consumer confidence, retailers are still concerned that fiscal cliff worries may dampen December sales. • Survey of economists/analysts says fiscal cliff is at top of worries. Over 35% of respondents to the CNBC survey say that the fiscal cliff is the biggest threat to the economic recovery. Although 41% believe that lawmakers will fail to reach a compromise in 2012, over 40% of respondents believe the issue will be resolved within the first weeks of 2013. Mark Ballenger is an investment and financial planning consultant offering services to individual investors and business owners. His company, Ballenger Asset Management, is located in Avon and can be reached at 970-471-9962. This report has been created with the cooperation of Platinum Advisor Marketing Strategies LLC. Securities offered through Cambridge Investment Research, a broker-dealer, member FINRA/SIPC. Ballenger is an investment adviser representative for Cambridge Investment Research Advisors Inc., a registered investment adviser. Ballenger Asset Management and Cambridge are not affiliated.