In a fiat currency monetary regime, capital markets are impacted immediately by any significant information suggesting the future actions of central bankers. World markets are especially sensitive to any news from the U.S. Federal Reserve Bank’s Open Market Committee (FOMC) regarding sentiments pertaining to its targeted federal funds rate (the interest rate at which banks lend funds maintained at the Fed to other banks). The Fed targets that rate through open market operations, that is, by buying or selling Treasury securities to its member banks. By affecting the money supply in this manner the FOMC has significant impact on potential price inflation and employment.

Unlike virtually every other asset, good or service exchanged in a free market economy, the prices of these short term securities (and therefore short term interest rates) are thus determined centrally by a committee comprised of experts, rather than through voluntary exchange. It is little wonder that Fed pronouncements are so carefully monitored, dissected and quickly reflected in security prices. Most recently, global markets were poised to react in response to whether the Fed would include the word “patient” in its policy statement. Because markets react so quickly to perceived changes in FOMC sentiments, individual investors have little chance of trading successfully based on the latest headlines pertaining to the Fed.

AIER recently noted that the FOMC, during its April meeting, did not change its forward guidance regarding future rate increases. AIER also noted that recent data suggesting weak GDP growth, a stronger dollar, a sluggish labor market and low price inflation (relative to the Fed’s target) all favor a more accommodative monetary policy. Forward markets priced in this information as it became available, and currently suggest that an increase in the fed funds rate beyond a range of 0.0% to 0.25% is highly unlikely at least until October. The fact that this information has been incorporated into market prices provides little comfort, however, to fixed income investors, who may have to wait until fall for even a modest increase in income, or to equity investors who still cannot rule out a sooner-than-expected increase in rates that could spark a sharp drop in stock valuations.

Also In This Issue

Quarterly Review Of Capital Markets
Cast In Iron
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow Jones Industrials Ranked By Yield
Recommended Investment Vehicles