On April 29, 2015 the Federal Open Market Committee (“FOMC”) met, discussed the economic outlook and, as usual, released a statement. The core view remains unchanged: the Committee expects growth to “expand at a moderate pace”. Right now, the lack of economic growth is not cooperating with those plans. Earlier that same day, first quarter GDP was recorded at 0.2% seasonally adjusted annual growth. This is down from a 2.2% pace in the fourth quarter. Acknowledging this, the FOMC indicated that the moderation in economic activity was due to “transitory factors”.
But it just was not a snowy winter that kept the Fed from raising rates. The Committee recognized that a stronger U.S. dollar has reduced the prices of imports – one of several factors that has left inflation below their target of 2%. In addition, the Fed noted that “the pace of job gains moderated, and the unemployment rate remained steady…a range of labor market indicators suggests that underutilization of labor resources was little changed”. In combination, data indicating both weak economic growth and low levels of inflation means that those who await higher interest rates may be waiting longer than expected.
To many, the uncertainty of sustained economic growth complicates the timing of interest rate increases. Per the statement, “in determining how long to maintain this target range, the Committee will assess progress – both realized and expected – towards its objectives of maximum employment and 2% inflation”. In other words, the Fed will remain data-dependent in its decision making and expects it will be appropriate to raise rates “when it has seen further improvement in the labor market and is reasonably confident that inflation” will move up closer to its target.
In addition, the Fed currently anticipates that “even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target Federal Funds Rate below levels the Committee views as normal in the longer run”. So it would seem that a rate increase from the Fed is not likely imminent – and when it does happen, there may not be much to it.
Given all this, how do we think about seeking yield? What is the yield-starved income investor to do in this challenging environment? During this transitional period leading up to an anticipated Fed rate hike, we believe it’s especially important to remain aware of the risks in reaching for yield. Yet we see no valor in sitting on the sidelines. Whether you harbor a fear of rapidly raising interest rates, or are simply waiting to benefit from them, we believe it makes sense to embrace a risk-conscious approach now. As we like to say, interest accrues on fixed income investments rain or shine (provided you avoid defaults). To meet the need for consistent high income, we recommend seeking a solution that is both sustainable and substantial – one that, in generating meaningful income today, does not jeopardize your ability to generate income in the future (by risking principal).
At Roosevelt Investments, we believe an effective way to go about generating a sustainable and substantial income stream is through an actively managed intermediate term investment grade portfolio. With this in mind, we designed the Roosevelt Current Income Portfolio for the conservative income investor seeking to maximize cash flows while preserving investment principal.
This information is intended solely to report on investment strategies and opportunities identified by Roosevelt. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. References to specific securities and their issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Please contact us at 646-452-6700 if there is any change in your financial situation, needs, goals or objectives, or if you wish to initiate any restrictions on the management of the account or modify existing restrictions, or if you would like to request a copy of our Code of Ethics. Our current disclosure statement is set forth on our Form ADV Part II, available for your review upon request, and on our website, www.rooseveltinvestments.com.