After a rough week for the stock market, Federal Reserve Chairman Jerome Powell announced new monetary policy changes following a scheduled Federal Open Market Committee (FOMC) meeting on Wednesday, September 22nd, 2021. These changes left investors unsure about the future of key stimulus measures which were enacted to combat the COVID-19 stock market crash. While stock market indices held onto their gains at the close of the trading week, the impending end of economic stimulus has the potential to send global markets reeling. As we approach the end of 2021, the retirement phase experts at Crash Proof Retirement® will be keeping a close eye on the markets and any moves from the Fed that could affect your retirement savings. Here is our take on the Fed’s announcements and what they could mean for your retirement nest egg.
Federal Reserve Talks Tapering
In March 2020, businesses shut down all over the country and investors became increasingly concerned about COVID-19. They began selling off stocks en masse. This led the Fed to begin a program of bond buying known as quantitative easing, or QE. When the pandemic hit, this tried-and-true bit of monetary policy had already proved its worth in the aftermath of 2008 market crash. During the 2008 global financial crisis, the Fed’s aggressive bond buying schedule helped prop up a shaky stock market, and in 2020, it found success once again. The Fed’s approximately $120 billion in monthly purchases of U.S. Treasury Bonds and mortgage-backed securities stabilized markets and even helped them consistently reach new record highs throughout 2020 and well into 2021, but with our national debt also reaching record highs, the evidence suggests that QE is not sustainable in the long term.
Wednesday’s announcement from the FOMC confirmed what many experts have suspected for months; that the Fed is ready to start reducing their quantitative easing measure before the end of 2021. The last time the Fed tapered their QE measures was in 2013, and back then it set off a period of market volatility that became known as a “taper tantrum.” From 2008 to 2013, the Fed added about $2.8 trillion to their balance sheet; however, from March 2020 to September 2021, they added more than $4.2 trillion in a significantly shorter period. It stands to reason that if 2013’s taper negatively impacted investor confidence, the next taper tantrum could be even worse. If the Fed begins tapering in 2021 or 2022, we could be in for a rocky stock market performance over the next several years.
Higher Interest Rates in 2022?
During past periods of economic uncertainty, the Fed has reduced its benchmark interest rate to give consumers easier access to money. Just like QE, reducing interest rates has proved to be a sound decision during recessions and it was a cornerstone of the Fed’s COVID-19 recovery strategy. Now, with that rate near 0%, regulators have very little room to reduce rates further—without going into negative territory—if another recession comes around. Now may be the time for a series of rate hikes, and the Fed’s announcement on Wednesday made it seem like a real possibility. The FOMC is currently split 50/50 on the idea of rate hikes in 2022, but some members have argued for a first quarter rate hike. While things could change at the Fed’s next meeting in November, a series of 6-7 rate hikes through 2024 seems likely, with the goal of increasing benchmark rates to 2% by the end of 2024.
The combination of tapering asset purchases and interest rate hikes over the next several years may be seen as a necessary step by members of the FOMC, but the Fed’s announcements this week were of little comfort to risk-asset investors. Policy decisions like these mean that there is a high probability that the economy will face a few difficult years, and this will be reflected in the securities industry, and more so in the bond market if Congress allows the U.S. to default on nearly $29 trillion in national debt. This scenario, coupled with recent ethical concerns about the personal investments of Federal Reserve officials who made stock and real estate trades as they were influencing monetary policy, are giving investors real reason to be worried about the Fed’s trustworthiness and the stability of the U.S. economy in the coming years.
Safe Alternatives for Retirement Investing
A volatile stock market and uncertain federal monetary policy could add up to big losses for your retirement savings if your assets are left in high-risk vehicles like stocks, bonds, and mutual funds. Tapering asset purchases and increasing interest rates are bound to cause a downturn in the stock and bond markets, and if you are invested in securities-based financial vehicles, you are putting your retirement in harm’s way. If you are in or near retirement, there are safe alternative investments based in the financial life insurance industry that are guaranteed to credit interest comparable to securities-based investments and compounded annually while ensuring the protection of your principal in the event of a stock market crash. If you would like to know more, schedule to speak with one of our licensed retirement phase experts at Crash Proof Retirement® and diagnose the risk in your accounts with our free financial checkup. Call 1-800-722-9728 or visit crashproofretirement.com for more information.