Posts filed under “Federal Reserve”

The Risk to Equities from Rising Rates

If risk-free returns on CDs have been returning performance equivalent to risk-laden returns on S&P500, the question some investors are asking themselves is "Why take the risk?"

That’s the issue Justin Lahart explores (inadvertantly) when exploring the issue of how low rates actually are:

"Even though the Federal Reserve has been raising rates since June 2004,
they’re low historically. Over the past 50 years, the fed-funds rate
(the main overnight rate the Fed controls) has averaged 5.75%. Today’s
[4.5%] hardly seems onerous . . .

Cd_v_spx_wsj

Ed Hyman, chief economist at research firm ISI Group, points out that those low, long-term yields are also a signal that returns on other investments are expected to be low.

Consider stocks. Last year, the S&P 500 index had a total return (including dividends) of 4.9%. Meantime, the average rate on a six-month certificate of deposit was 4.6% in December. They’re so close, you can imagine investors socking a bit more money in (safer) CDs and a bit less in (riskier) stocks.

These low expected returns have ramifications on economic prospects. It gives companies less reason to spend money on the equipment or new hires to expand. It gives venture capitalists less reason to fund budding businesses. In short, it discourages investment, and makes economic growth harder to come by as a result.

Today’s low short-term rates may be plenty high."

Interesting stuff . . .

Source:
Interest-Rate Lowdown
AHEAD OF THE TAPE
By JUSTIN LAHART   
January 11, 2006; Page C1
http://online.wsj.com/article/SB113694267958643312.html

Category: Federal Reserve, Fixed Income/Interest Rates, Investing

Tools for Finding a Mortgage

Category: Federal Reserve, Real Estate

Barrons picks up “Myths of the Greenspan Era”

Category: Federal Reserve, Media

Once Fed Hikes Stop, Markets Fall

Category: Federal Reserve, Inflation, Markets

The Best Writings of Ben S. Bernanke

Category: Federal Reserve

PARSING THE FED

Category: Federal Reserve

New Column: Myths of the Greenspan Era

Category: Federal Reserve

Myths of the Greenspan Era

Myths of the Greenspan Era Barry Ritholtz 01/31/06 – 11:08 AM EST http://www.thestreet.com/story/10265345/myths-of-the-greenspan-era.html ~~~ The 18-plus-year tenure of Federal Reserve Chairman Alan Greenspan finally comes to an end today. The buildup to his retirement has become the largest love-fest since Woodstock. I won’t review any of the accolades or criticisms that have become so ubiquitous…Read More

Category: Federal Reserve

Free Lunch: Myths of the Greenspan Era

Category: Federal Reserve

Chart of the Week: 10 year Treasury 1974-2006

Category: Federal Reserve, Fixed Income/Interest Rates