By: Mark Schieffer, CFA
EVP Chief Investment Officer
Fed Chairman Ben Bernanke continues to move the Fed to a more transparent era, now publishing individual interest rate forecasts from each of the 14 FOMC members. As part of this commitment to showing all the cards, Mr. Bernanke announced that the Fed is likely (my emphasis) to keep short term interest rates obscenely (my word choice) low through the end of 2014. In my opinion, this is essentially QE3—more quantitative easing—without actually having to do anything. Keeping short term interest rates near zero has been the FOMC policy since 2008, so this is not a change in policy, merely an extension of long existing policy. Extending the time frame through 2014 (three more years for those keeping score) encourages more risk-taking. If cash is not going to pay you anything for three years, you are strongly incented to take on more risk in the form of lending, buying longer term assets, or investing in the stock market. Of course, the Fed reserves the right to change their mind if conditions improve, and they do appear to be improving, at least here in the U.S. The FOMC’s current stance of encouraging more risk-taking by the numbers is in line with their European central bank counterparts. Banks are encouraged to borrow from the central banks in order to buy central bank-sponsored sovereign debt, thereby giving confidence (???!!) to investors in the form of improved bond prices from on-the-edge folks countries like Italy. The 10-year Italian bond traded at a yield of roughly 7.5% in late November and has rallied all the way down to 5.5% currently.
The January employment figures continue to show a trend line of sludgy improvement. Non-farm payrolls grew by 243,000 and the unemployment rate fell to 8.3%, the lowest figure in nearly 3 years. The Obama administration is hoping this continues, right in time for the November election cycle. The improving labor situation, coupled with pent up demand for autos—the avg. age of a U.S. car/truck on the road is a record 10.8 years (come to think of it, my household is skewing that figure to the low side as we haven’t purchased one in only seven years)—is certainly creating opportunities for credit unions to increase their auto loan portfolio. At an annual pace of 14.1 million unit sales, the auto industry is at its highest level since the government-sponsored August 2009 “cash for clunkers” program.
Interest rates are essentially unchanged over the last month, with the 2-year T-note yield in a range of .25-30% and the 10-year note trading between 1.80-2.00%. Stock performance is good in 2012 so far, with the implied backing of central banks around the world (see above). The Dow index is up almost 4% year-to-date and the S&P index is up nearly 6% during the period.