Fed ‘Taper’ and What it Means for Interest Rates
As we begin Q4 of 2021, we look at key factors in today’s Steady Investor that we believe are currently impacting the market, such as:
- Fed “taper” and what it means for the markets
- One reason why the Fed taper may not lead to surging interest rates
- The beneficiaries of supply chain problems
What Does the Fed “Taper” Mean for Markets? – In a highly anticipated move, the Federal Reserve announced this week that it would begin unwinding (often referred to as “tapering”) its $120 billion monthly bond and mortgage security purchases. In the aftermath of the Great Recession and the early months of the pandemic, the Fed implemented these monthly purchases to stimulate demand for long-duration bonds and mortgage securities, which has the effect of keeping upward pressure on prices and downward pressure on interest rates associated with the debt. The Fed’s actions are designed to keep borrowing costs low, which theoretically stimulates economic activity. But manufacturing low, risk-free interest rates also nudges investors towards areas of the market where they can generate yield, which is a significant reason equity markets have seen such sustained inflows. The question many investors are asking now is, will the Fed taper put upward pressure on interest rates over time, thereby reducing the relative attractiveness of stocks? The answer might be yes if we expected long duration Treasury bond yields to shoot higher as the Fed trimmed bond and mortgage security purchases, but we do not expect that to be the case. The Fed is intentionally winding down its programs slowly, while widely telegraphing its plans to the market. As for as interest rate increases, we may not see any moves to the fed funds rate for a year or longer. In other words, the taper and associated tightening are poised to happen very slowly, which should give the markets ample time to adjust. When Federal Reserve Chairman Jerome Powell announced the taper, stocks climbed to an all-time high.1
Are you planning your retirement or having thoughts about getting prepared? If so, it’s important to be able to generate income from your retirement investments and avoid risk.
You may not know where to invest and cash won’t do, but a portfolio invested in stocks with a strong track record of dividends and dividend growth may give retirees the potential for a stable and predictable source of income.
To learn more about how to use dividend-paying stocks in your strategy to potentially generate cash flow for retirement, check out our guide, “Retirement’s Uphill Battle: Generating Income in a Low-Interest Rate Environment.”
If you have $500,000 or more to invest, click on the link below to get our free guide today!
Retirement’s Uphill Battle: Generating Income in a Low-Interest Rate Environment.2
One Key Reason the Taper May Not Lead to Surging Interest Rates – While the Fed tapers and reduces artificial demand for long-duration bonds and mortgage securities, demand for U.S. debt may continue apace from abroad. In surveying the world of ‘risk-free’ debt, German 10-year bond yields are essentially zero, at 0.07%. French, Irish, Dutch, and Swiss yields are also hovering at the zero bound. All told, there is approximately $10 trillion in negative-yielding global debt, meaning investors need to pay money to own those bonds. By comparison, long-duration U.S. Treasuries likely continue to look attractive to global investors, and continued demand can keep upward pressure on price and downward pressure on yields.3
The Beneficiaries of Supply Chain Problems – Problems associated with snarled supply chains have a steady presence in headlines today: rising input costs, jammed ports, higher prices for consumers, items missing from the shelves, and delayed delivery times. Retailers and consumers are feeling some difficulties and frustrations, but some companies are reaping big benefits from these global supply strains: shipping and trucking companies. Jammed ports and sustained demand have pushed up ocean freight rates to near-record levels, which is funneling through to shipping companies in the form of higher profits. A.P. Moeller Maersk, one of the world’s largest shipping companies, posted a Q3 profit of $5.44 billion, which is more than five times what it generated in the same quarter last year. That’s also more profit than UPS or Amazon posted for the quarter. Trucking companies are benefitting as well – Schneider National, which is a trucking company based in Wisconsin, saw net income of $110 million and set an all-time record for earnings-per-share in Q3.4
Generating Income in Your Retirement – You still may be wondering where to invest during these unprecedented times, as cash won’t do. We would suggest considering stocks that are growing earnings and dividends and have a track record of doing so.
To learn more about how to use dividend-paying stocks in your strategy to potentially generate cash flow for retirement, check out our guide, “Retirement’s Uphill Battle: Generating Income in a Low-Interest Rate Environment.5”
If you have $500,000 or more to invest, click on the link below to get our free guide today!
2 Zacks Investment Management reserves the right to amend the terms or rescind the free Retirement’s Uphill Battle: Generating Income in a Low-Interest Rate Environment offer at any time and for any reason at its discretion.
3 Wall Street Journal. August 31, 2021. https://www.wsj.com/articles/eurozone-inflation-hits-decade-high-as-bottlenecks-bite-11630408733?mod=djemMoneyBeat_us
4 Wall Street Journal. November 2, 2021. https://www.wsj.com/articles/supply-chain-pain-is-maersks-gain-as-5-44-billion-profit-dwarfs-amazon-ups-11635875173?mod=djemRTE_h
5 Zacks Investment Management reserves the right to amend the terms or rescind the free Retirement’s Uphill Battle: Generating Income in a Low-Interest Rate Environment offer at any time and for any reason at its discretion.
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