Janet Says: Take That Seniors

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Janet Yellen held her first press conference as Chair of the Federal Reserve Board Wednesday. She promised to continue to penalize the elderly retired and others who are income dependent.

The Fed having now kept short-term interest rates at the zero bound since 2008, Janet reassured bankers that they can count on free money at least into next year and very possibly longer.  By the way, Seniors, you can count on no return from risk-free investments.  That wasn’t enough, however.  Janet also pledged to keep trying to push inflation up, which will assure that the things you have to buy will cost more.  Lest you think that push might at least give you Seniors a shot at higher income, Janet said: “Not so fast.”  Even after inflation gets to 2% or more, she promised to help bankers by keeping rates near zero for a “considerable period of time.”  Sorry, Seniors.

Perhaps you could get a little yield if you did what the Fed has been trying to “force” you to do (their word).  However, because longer interest rates have risen since late-2011, if you made bond purchases in that period of time, you’ve probably lost money despite the Fed’s best efforts to keep bond prices elevated.  If longer rates continue to rise, which is the Fed’s forecast, bond holdings could lose money for years.  Maybe that’s not a great idea for Seniors who likely will never be able to replace lost capital.

Instead, Seniors might want to ramp up the risk level even higher by adding equities to their portfolios.  After all, the Fed has admitted that one of the purposes of its ultra-stimulative monetary policy is to boost asset prices to create a positive “wealth effect.”  It certainly has succeeded in boosting stock prices to the point at which they are today overbought, overvalued and overloved.  It’s an open question whether Seniors should count on a continuation of that positive effect as the Fed tapers and ultimately ends extraordinary stimulus.

Almost all analysts with a knowledge of history anticipate that the Fed’s explosive debt creation will end badly, but there’s no timetable for such an outcome.  As long as investors’ faith in central bankers remains strong, the good times can continue to roll.  How many Seniors will have the foresight to step away before stock prices experience significant damage?  Will the Fed soon lose control of equity prices as they have lost control of longer interest rates over the past two years?

If the Fed’s historic monetary experiment ultimately fails, not only will Seniors have been deprived of income for much of their retirement, they may also have been prodded to lose their capital.  Talk about unintended consequences.  Thanks, Janet.

On a far happier note, for those of a similar persuasion, Go Cats!