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STA Weekly Report – Is it time to say goodbye to the rate hiking cycle?

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INSIDE THIS EDITION:
Is it time to say goodbye to the rate hiking cycle?
Weekly Snapshot of Global Asset Class Performance
Recession Survival Guide
401k Plan Manager

The Federal Reserve kicked off its first interest rate hiking cycle, after keeping it at zero percent for seven years, in December 2015.

In 2017, strong global growth set an expectation that other Central Banks would follow the Fed’s footsteps and start to normalize monetary policy across the globe. The thinking was that this would enable Central Banks to reload their weapon to fight against the next recession. Additionally, savers would make a decent income from their bank deposits.

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Only one year after, the Fed reversed course and started to cut rates again after seeing a peak rate of 2.5%, well below peak rates reached in previous cycles. The Reserve Bank of Australia (RBA) continues cutting rates. The Bank of Japan (BOJ) has kept rates below zero. The European Central Bank (ECB) cut again in 2019 and pushed rates deeper into negative territory.   

As far as unconventional monetary policy goes, the Fed has halted Quantitative Tightening (QT) and instead decided to reflate its Balance Sheet, although it decided to not name it Quantitative Easing (QE). The Bank of Japan similarly resumed pilling up capital reserves.

Despite the accommodative monetary policy, domestic inflation rates have stubbornly remained below 2%, the Central Bank’s inflation target. As a result, it appears safe to say goodbye to the latest rate hiking cycle, though interest rates in most other developed countries haven’t really taken off.
Additionally, we believe this dynamic necessitates revisiting the Taylor Rule, an interest rate forecasting model created by economist John Taylor in 1992.

It suggests how central banks should change interest rates to account for growth and inflation. For two decades following 1990, the Fed’s policy rate has remained largely in line with what was suggested by the Taylor Rule. However, it appears to no longer apply. Since the recovery from the great financial crisis, the Taylor Rule has consistently suggested much higher interest rates than what we have had. After years of extra accommodative monetary stimulus, global growth and inflation remain tepid, at best.

With monetary policy diverging from rates suggested by the Taylor Rule, we wonder if this economic model is no longer effective or whether a new financial theory should guide Central Banks.         

Recession Survival Guide

By Scott A. Bishop, MBA, CPA/PFS, CFP®

Over the years, I have written many articles on financial planning. Several of those have been “guides” to help readers through different stages of their life or lifecycle events. Two of those were the Retirement Survival Guide and Layoff Survival Guide.

Over the last year or two, I have had many friends and clients ask about the pending “recession”. Many have been waiting for the next one almost every year since the “Great Recession” of 2008. As no one knows for sure when (not if) the next recession will come, I felt that it was time to start considering writing a “Recession Survival Guide”. As I have written many of the components that I will eventually reference in that guide, I thought I would start out with this article sharing some thoughts, pointers, and guidelines that may help you find good solutions for you and your family.

The bottom line, for any risks in life you need to address, you should have a plan – don’t react. Once a future recession is upon us, many will react on fear which typically ends in a less than optimal solution. As a long-time financial planner, I know that having a plan in advance of any unexpected event will allow you to make optimal decisions to help keep you and your family on track to your longer-term financial goals and objectives. With that in mind, here are some thoughts and linked articles for your consideration to help you “survive” any future recession.

Recession Risks

Before you start reacting or even planning, it is good to help understand what risks and issues you must address related to a recession. Don’t just worry about whether the next recession or bear market will destroy your portfolio, have a plan and don’t make bad decisions while riding the stock market rollercoaster

READ FULL ARTICLE HERE

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IMPORTANT DISCLOSURES

Financial Planning and Investment Advice offered through STA Wealth Management (STA), a registered investment advisor. STA does not provide tax or legal advice and the information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters or legal issues, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.  These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. As always, a copy of our current written disclosure statement discussing our services and fees continues to be available for your review upon request.

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