What These Fed Comments Mean For YOUR Income

Bias in the media is a popular topic of debate. It’s also important for investors to consider.

Truthfully, I’m biased. If you’re honest, you’ll admit you are too. In my opinion, those biases should affect our votes and not our investments.

I work hard to prevent biases from interfering with my analysis. That means I read reports that companies file with the SEC, and I review their presentations and press releases. Doing this allows me to make decisions based on the information analysts working at Wall Street firms have while avoiding their biases.

Avoiding bias also means I spend a lot of time reading speeches made by members of the Federal Reserve. I think that’s important to do because Fed governors tend to use their words to “send messages” rather than just say something directly. Analysts call this “Fedspeak” because it often feels like a foreign language.

Deciphering The Fed

This week, Fed Governor Lael Brainard gave a speech that contained important information about what she expects the policy to look like in the coming months.

She noted that, “With the policy rate constrained by the effective lower bound, forward guidance constitutes a vital way to provide the necessary accommodation. For instance, research suggests that refraining from liftoff until inflation reaches 2 percent could lead to some modest temporary overshooting, which would help offset the previous underperformance.”

This tells me the Fed plans on keeping rates above zero, avoiding the negative rates that European and Japanese central bankers implementing.

Brainard also said the Fed would continue to provide forward guidance which involves talking about policy changes before they occur. So, we should expect short-term rates to remain near zero until at least the end of 2021.

An important part of the speech was at the end.

“Forward guidance and asset purchases were road-tested in the previous crisis, so there is a high degree of familiarity with their use.

Given the downside risks to the outlook, there may come a time when it is helpful to reinforce the credibility of forward guidance and lessen the burden on the balance sheet with the addition of targets on the short-to-medium end of the yield curve.

Given the lack of familiarity with front-end yield curve targets in the United States, such an approach would likely come into focus only after additional analysis and discussion.”

That’s a lot of Fedspeak.

What it all means is that we shouldn’t expect any changes. That is, until the Fed completes an “analysis and discussion” of how to target interest rates for bonds that have maturities of five years of more.

Bottom line:

– The Fed is concerned about downside risks.
– Short-term interest rates will remain near zero for at least another year. This will help consumers finance cars, refinance homes, or make other large purchases.
– The Fed is looking at finding new ways to address the crisis.
– One tool under consideration is the ability to influence longer-term interest rates. This could have a significant impact on consumer lending by keeping rates low.
– Fed officials are very worried.

Action To Take

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