The past week brought a heavy wave of commentary about the Federal Reserve’s plans to begin increasing the federal funds rate. Although Federal Reserve Vice-Chair Stanley Fischer recently explained that the rate increases would be so incremental that they should not significantly impact the markets, we might see an initial “shock” reaction, once the Fed finally budges off from “zero interest rate policy” (ZIRP).
Regardless of how market participants react to the initial rate hike, retirement investors need to be mindful of the fact that the European Central Bank has its own quantitative easing program well underway. Even with the slightest interest rate hike by the Fed, we can expect some strengthening of the dollar, causing the euro to weaken even further. As a result, many export-dependent businesses could experience revenue declines, as our products become less-competitively-priced in foreign markets. Bond guru Jeffrey Gundlach has already warned that the consequences of increasing dollar strength, along with the global economic slowdown, could become apparent by the middle of this year.
Jeffrey Gundlach’s opinion that the U.S. will not likely experience 3.0 percent growth in 2015 or even 2016, appeared to get some support on Friday, when the Commerce Department’s Bureau of Economic Analysis reported that its second estimate of first-quarter GDP,was revised downward from 0.2 percent expansion to 0.7 percent contraction. Although Fed Chair Janet Yellen explained that economic expansion during the first quarter was impacted by “a variety of transitory factors”, what we are seeing – so far – is a confirmation of Jeffrey Gundlach’s expectations.
The picture we are presented with at this point suggests that interest rates will be rising from near-zero – albeit at a small and gradual pace – at a time when economic expansion would be occurring at an unknown rate, while the European Central Bank continues to weaken its currency. One cautious move retirement investors might want to make with their bond allocation, could involve taking advantage of the Vanguard Short-Term Bond ETF (NYSERACA:BSV) and waiting until the dust settles.