If you have been keeping up with the news, you probably know that the Fed met and discussed the timeline to raise rates. To keep the long story short, Fed chairman Jerome Powell stated that rate increases are definitely on the table but the labor market still has a long way to go. Basically, he’s stating the Fed will do nothing. There will be no immediate rate hike and we may not even see a rate hike late next year. The Federal Reserve is supposed to be an independent branch of the government not influenced by politics but whenever Congress passes a stimulus bill, it seems that the Fed is right behind with the printing presses roaring. Here are some reasons why the Fed will not be raising rates anytime soon.
Incentives to not work
Our government right now is incentivizing people to not work and pay rent by offering generous stimulus checks and rent relief. While both programs are noble in nature, with the economy picking up we’re seeing more people take advantage of these programs instead of participating in the labor force. The labor shortage is real and is affecting the entire market from restaurants to food manufacturers. The labor shortage was created by the government, albeit accidentally, after it introduced and maintained these relief programs. Some people are refusing to get vaccinated and no doubt that these programs played a part!
When the Fed artificially creates low rates, it makes bonds and other similar instruments such as debt less attractive compared to equities or real estate. As a result, some real bond yields including Treasuries are now negative and junk bonds are now yielding below the inflation rate. However, this benefits the government because its debt is now essentially cheaper and provides even more motivation to spend. This is one of the reasons why we continue to see real estate prices skyrocket due to the availability of cheap mortgages / debt. This also applies to the government and cheap debt allows it to spend more.
Declining Middle Class
This isn’t a new problem but COVID really accelerated the timeline and exposed what we already knew. The American middle class is shrinking and one could argue that it no longer exists. Most of the stimulus money actually went to the wealthy instead of those who really need it thus widening the wealth gap. The main driver of any economy is the middle class which is why we see China growing so fast with its middle class emergence. The opposite trend is happening in America and we will eventually see China surpass the US economically and militarily.
This was exacerbated during the Trump election but it was clear that ever since Obama was elected president that there was a divide in the US. Rural vs. urban, no side seems willing to compromise and many have made politics their identity instead of really looking at the facts and supporting those who wish to bring America back together. We are seeing both the left and right becoming more radicalized which is dangerous for America. Meanwhile, China is taking advantage of this divide by improving its relations with Europe and expanding its Belt and Road project to Eurasia and Southeast Asia. Until America learns to deal with itself and bring itself together, the decline will continue and no side wants to take the blame of the impending economic crash.
So what do I do if I’m a new investor?
If you recently graduated college and have begun to contribute to retirement plans, don’t stop investing! No one can time the market and cash sitting on the sidelines makes no money. If you don’t have a large balance to begin with, there really is no excuse to stop investing. In fact, because debt is so cheap it would make sense to utilized leveraged ETFs with a small balance as discussed here. We do not expect the Fed to raise rates anytime soon so the best time to start investing is yesterday and second best is now.