The FED cannot do much more than it is doing to support the stock market and asset prices. Two metrics that influence the Federal Reserve’s Monetary Policy are:
Employment: The Fed is looking for signs that the slack in the job market is declining. They are following the U6 “underemployment” rate or the level of people working part-time because they can’t find full-time work or are otherwise marginally attached to the labor force. The gap between the U3 (total unemployed) and the U6 (underemployed) suggests there is plenty of room for the labor markets to tighten up before there is a risk that rising wages will lead to inflation. The U3 and U6 unemployment measures are still higher than the peaks seen during previous recessions.
Inflation: The Consumer Price Index increased .30% in June over the prior month. Year over year the inflation rate remained steady at 2.10%. Two-thirds of the increase was primarily driven by the gasoline index. However, since June, oil and gas prices have decreased which should lower inflation expectations and keep the Federal Reserve on the same easy monetary policy path.
The FED cannot do much more than it is doing to support the stock market and asset prices. Two metrics that influence the Federal Reserve’s Monetary Policy are:
Employment: The Fed is looking for signs that the slack in the job market is declining. They are following the U6 “underemployment” rate or the level of people working part-time because they can’t find full-time work or are otherwise marginally attached to the labor force. The gap between the U3 (total unemployed) and the U6 (underemployed) suggests there is plenty of room for the labor markets to tighten up before there is a risk that rising wages will lead to inflation. The U3 and U6 unemployment measures are still higher than the peaks seen during previous recessions.
Inflation: The Consumer Price Index increased .30% in June over the prior month. Year over year the inflation rate remained steady at 2.10%. Two-thirds of the increase was primarily driven by the gasoline index. However, since June, oil and gas prices have decreased which should lower inflation expectations and keep the Federal Reserve on the same easy monetary policy path.
Maybe the federal government should
shut down more often.
Stocks soared 2%-3% after the warring
parties in Washington, D.C., hammered out an 11th-hour deal Wednesday,
temporarily funding the budget and raising the Treasury’s debt ceiling, which
allowed the government to reopen its doors. Never mind that markets will likely
face a similar threat again around early February, since the deal is simply a
provisional patch-up.
For
a little while, anyway, investors won’t have to worry much about D.C., and
that’s something to be thankful for. Markets will get back to parsing
third-quarter earnings reports, which will move to the forefront for the next
few weeks, until the retail selling season begins on Thanksgiving.
Positive quarterly profit-report
surprises released late in the week from well-known names like Google (ticker: GOOG), Morgan Stanley (MS), and General Electric (GE) helped push
the market forward. They were more than enough to make up for
weaker-than-expected results from Goldman
Sachs Group (GS), and IBM (IBM).
The latter two, down 1% and 7%, respectively, restrained the Dow Jones
Industrial Average, as their relatively high-priced stocks make them among the
most influential in the index.
Nevertheless, the Dow rose 163 points
on the week, or 1%, to 15,399.65. The S&P 500 index, meanwhile, jumped 41
to 1744.50, setting a new all-time closing high in the process, which the Dow
was unable to do. The Nasdaq Composite index soared over 3%, or 122 points, to
3914.28, and is up a whopping 30% on the year. That’s its highest close since
Sept. 8, 2000.
In the context of the Federal
Reserve’s continuing easy-money policy and low interest rates, restrained
inflation, and decent earnings growth, the path of least resistance is up, says
Michael Purves, chief global strategist at Weeden. “The market looks a lot
like 2012 now, with strong Fed support and slow grinding growth,” he adds.
Indeed, the Fed is “highly
unlikely” to initiate any tapering—that is, reining in its monthly
bond-buying fiscal stimulus—at its end-of-October meeting, says Peter
Jankovskis, co-CIO at Oakbrook Investments.
While the market rose Thursday after
the debt-ceiling deal, Friday’s rise came on good old-fashioned earnings
surprises, he says. Getting the focus away from Washington and back on
corporate earnings is a positive, he adds.
Even so, the bull is beginning to show
its age, he adds. While earnings growth is decent, “companies are
struggling with revenue growth,” which ultimately is expressed in future
profits, Jankovskis says.
If the market does surge higher,
Purves says, investors will have to grapple with a bull whose characteristics
are becoming riskier. Continued inflows of money into equities will push the
market higher, but this is a bull where the price-to-earnings (P/E) ratio is
higher and the earnings growth rate lower than many of its predecessors (Source: Barrons Online).
The Federal Reserve unexpectedly refrained from reducing the $85 billion pace of monthly bond buying, saying it needs to see more evidence of improvement in the economy.
“The Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases,” the Federal Open Market Committee said today at the conclusion of a two-day meeting in Washington. While “downside risks” to the outlook have diminished, “the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement.”
Chairman Ben S. Bernanke and his policy making colleagues refrained from paring record accommodation as rising borrowing costs show signs of slowing the four-year expansion. Treasury yields have jumped since May, when Bernanke first outlined a possible timetable for a reduction in the asset purchases that have swelled the Fed’s balance sheet to $3.66 trillion.
The Fed chairman has orchestrated the most aggressive easing in the Fed’s 100-year history, pumping up the balance sheet from $869 billion in August 2007 and holding the main interest rate close to zero since December 2008.
“Asset purchases are not on a preset course, and the committee’s decisions about their pace will remain contingent on the committee’s economic outlook as well as its assessment of the likely efficacy and costs of such purchases.”
The U.S. Department of the Treasury and the Internal Revenue
Service (IRS) last week ruled that same-sex couples, legally married in
jurisdictions that recognize their marriages, will be treated as married for
federal tax purposes. The ruling applies regardless of whether the couple lives
in a jurisdiction that recognizes same-sex marriage or a jurisdiction that does
not recognize same-sex marriage.
The ruling implements federal tax aspects of the June 26 Supreme Court decision invalidating a key provision of the 1996 Defense of Marriage Act.
Under the ruling, same-sex couples will be treated as married for all federal tax purposes, including income and gift and estate taxes. The ruling applies to all federal tax provisions where marriage is a factor, including filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA and claiming the earned income tax credit or child tax credit.
Any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory or a foreign country will be covered by the ruling. However, the ruling does not apply to registered domestic partnerships, civil unions or similar formal relationships recognized under state law.
Legally-married same-sex couples generally must file their 2013 federal income tax return using either the married filing jointly or married filing separately filing status.
Individuals who were in same-sex marriages may, but are not required to, file original or amended returns choosing to be treated as married for federal tax purposes for one or more prior tax years still open under the statute of limitations.
Generally, the statute of limitations for filing a refund claim is three years from the date the return was filed or two years from the date the tax was paid, whichever is later. As a result, refund claims can still be filed for tax years 2010, 2011 and 2012. Some taxpayers may have special circumstances, such as signing an agreement with the IRS to keep the statute of limitations open, that permit them to file refund claims for tax years 2009 and earlier.
Additionally, employees who purchased same-sex spouse health insurance coverage from their employers on an after-tax basis may treat the amounts paid for that coverage as pre-tax and excludable from income.
How to File a Claim for Refund Taxpayers who wish to file a refund claim for income taxes should use Form 1040X, Amended U.S. Individual Income Tax Return.
Future Guidance Treasury and the IRS intend to issue streamlined procedures for employers who wish to file refund claims for payroll taxes paid on previously-taxed health insurance and fringe benefits provided to same-sex spouses. Treasury and IRS also intend to issue further guidance on cafeteria plans and on how qualified retirement plans and other tax-favored arrangements should treat same-sex spouses for periods before the effective date of this Revenue Ruling.
Other agencies may provide guidance on other federal programs that they administer that are affected by the Code.
Revenue Ruling 2013-17, along with updated Frequently Asked Questions for same-sex couples and updated FAQs for registered domestic partners and individuals in civil unions, are available today on IRS.gov.
Treasury and the IRS will begin applying the terms of Revenue Ruling 2013-17 on Sept. 16, 2013, but taxpayers who wish to rely on the terms of the Revenue Ruling for earlier periods may choose to do so, as long as the statute of limitations for the earlier period has not expired.
As we forecasted in the last three issues of The Weekly Commentary, the FED’s Chairman, Ben Bernanke, calmed the bond market using wording in his Congressional testimony that pressured the bond market to reduce interest rates. We suspect this tactic will continue with the end result of interest rates on mortgages, bonds with a maturity of 5 or more years, and intermediate/long term bond funds will decline for the next 1 to 3 weeks. This tactic which I call “jawboning” can work for only a limited time period until economic reality sets in again at which time interest rates could move higher. Our interest rate forecast is for interest rates on the above mentioned securities will generally decline for 1 to 3 weeks or longer, but rise over the next 5 to 10 years.
You may have seen recent newspaper headlines, “Interest Rates Are Rising!” You may have wondered how that could be the case since the FED has held interest rates steady for a total of 4 ½ years. The explanation is the FED controls short term interest rates that affect the interest rates on short term Treasury Bills, bank Savings Account rates, bank CD rates and money market account rates – these rates have not moved.
The newspaper headline, “Interest Rates Are Rising!” is describing longer term maturities like the U.S. Treasury Bond with a 10 year maturity, home mortgage interest rates, and commercial mortgages. The FED usually has only a small influence on the direction of these long term rates; but, the FED has been actively buying these long term maturity securities in the marketplace using an unconventional and questionable system that experts call “Quantitative Easing”. The FED continues to buy these longer term maturities at the same pace. Recently bond market speculators have been trying to jump in front of the FED tapering of Quantitative Easing to sell their present bond holdings. When more sellers exist in a marketplace than buyers, prices go down – in this case bond prices.
To understand bond prices and interest rates, click here:
