On June 13th, 2018 the federal reserve raised interest rates 25 basis points and altered their expectation to raise rates a total of 4 times this year, compared to earlier expectation of 3 raises.
In his meeting with reporters to discuss fed policy, fed chair Powell stated, “Households are in good shape, and that is so important, that’s where we got into trouble before, and its often around property and housing that you see real problems emerge but we don’t see that now, and we take some solace from that.”
However, he also said, “Economic strength hasn’t reached everyone.”
While unemployment is stated at 3.9%, U6 unemployment remains higher at 7.6%
Why does this matter? While U3 is the official unemployment rate, U5 unemployment adds on discouraged workers and all other marginally attached workers. These people are still unemployed, but not in the job market for a variety of reasons. U6 unemployment adds on those workers who are part-time purely for economic reasons.
In addition, many of the jobs created since the Great Recession have been part time or Gig economy jobs. Many of these jobs do not provide benefits such as health insurance, disability insurance, life insurance or retirement plans. People working such jobs have increased responsibility to set up protection for themselves
Several recent studies, including one by the Federal Reserve showed the depth of the weakness:
- Forty percent of American adults don’t have enough savings to cover a $400 emergency expense such as an unexpected medical bill, car problem or home repair.
- Forty-three percent of households can’t afford the basics to live, meaning they aren’t earning enough to cover the combined costs of housing, food, child care, health care, transportation and a cellphone, according to the United Way study. Researchers looked at the data by county to adjust for lower costs in some parts of the country.
- More than a quarter of adults skipped necessary medical care last year because they couldn’t afford it.
- Twenty-two percent of adults are not able to pay all their bills every month. (1)
When asked about the impact of low unemployment on inflation, Alan Blinder, former Fed Vice chair and Princeton economics professor, said “For the past 20 yrs models like the Philips curve hasn’t worked.” He notes, “Models that used to predict unemployment, interest rates and economic growth don’t function anymore.”
As a result, even though unemployment is low, we do not see wage growth for most Americans, and economists cannot figure out why that is or how it can be remedied.
Several economists, including Ben Bernanke, have stated concern that in 2020 the Trump budget cuts will expire and the economy will suffer. (2)
In other news, on Thursday June 14th Mario Draghi, chair of the ECB, announced the ECB will stop asset purchases in December 2018. This will mean additional upward pressure on European bond yields, as well US treasuries and other global bonds. As central banks stop buying debt that is issued and coming onto the market it will create more pressure to move bond yields higher.
So, what does this mean for retirees?
As bond yields rise, the value of bonds declines. The impact on long dated bonds is even larger than short term bonds. Bonds have traditionally been a store of value and a shock absorber for market volatility. A decade of Quantitative Easing has driven bond yields lower, but that environment is changing.
Talk to your financial advisor about strategies that can be used to manage risk in this new environment. If you have questions or want to discuss this article in more detail please feel free to reach out to me.
To discuss this issue and others related to retirement and building a sustainable financial future reach out to me at firstname.lastname@example.org
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