Many years ago, I lived near the Culinary Institute of
America, the alma mater of many of the world's most celebrated
chefs. After years of classes, the students' final proving ground
was cooking for the institute's public restaurants.
In the 1970s and 1980s, the institute's premier restaurant was
the Escoffier Room. It was expensive. And if you wanted to dine
there, you had to plan ahead. In many cases, reservations had to
be made ayear in advance.
Every night, students were expected to deliver culinary
perfection. And for the unlucky student assigned to the souffle
station, the pressure was immense.
In chef Anthony Bourdain's book "Kitchen Confidential," he
tells how students prayed every night, hoping to avoid the
assignment to make the puffy egg-based dish, which had a tendency
to collapse if conditions weren't perfect. To add insult to
injury, the domineering head chef would berate any student
responsible for a fallen souffle, loud enough for all to
The Federal Reserve is now standing in front of the
economic equivalent of a souffle station.
The Fed is likely to maintain historically low short-term
interest rates for some time. But based on comments made on May
22 by ChairmanBen Bernanke , the Fed is attempting to figure out
the appropriate time to cut back on its program called
quantitative easing. Under this program, the Fed has been buying
long-term Treasurys and mortgage-backed securities in an effort
to hold down long-term interest rates.
In the kitchen, souffles fail for primarily two reasons. If
youopen the oven door too early, the cool airwill deflate a puffy
souffle like a stuck balloon. If you whip the eggs too long, you
can literally beat the rising energy out of them.
Inmonetary policy , the same risks apply.
The Fed is afraid to stop its asset-buying program too soon,
for fear it will start to deflate our slowly risingeconomy . But
after years of quantitative easing, the Fed doesn't want the
economy to become toodependent oneasy money . For instance,
financial institutions have been able to passively borrowmoney at
super-low rates and invest it in high-yielding securities. The
Fed wants a more energetic banking sector, one that is motivated
toloan money to businesses so that they can expand and hire.
On June 18, the Fed started its much anticipated two-day
monetary policy meeting.
On Wednesday, Bernanke held a briefing to try to convince the
world that he is not going to open the oven door just yet. He
did, however, try to hint to financial institutions that they
need to prepare for a time when the Fed will no longer whip out
The Fed Could Get the Recipe Exactly Right, and Still
Securities markets understand the Federal Reserve's delicate
predicament. No matter what Bernanke says at the briefing,
investors may continue to wring their hands until they see proof
that the Fed's souffle -- the economy -- can stand on its
Also, individual investors as well as financial institutions
want to stay one step ahead of the Fed. So if Bernanke whispers
about slowing quantitative easing, the market may hear it as a
We could see a continued market overreaction in the aftermath
of Bernanke's briefing. As a result, dividend-paying securities
-- and especiallyfixed-income securities -- could feel the brunt
But much of this will be a short-term phenomenon, and I
am in this for the long haul.
Over the last few months, I've pared back some of my
portfolio's exposure to longer-duration fixed-income securities.
I may continue to cull a few more positions over time if
conditionswarrant . I've also added some securities that I
believe will do well in the road ahead, such as the insurance
and semiconductor company
Intel (Nasdaq: INTC)
I've also kept my eyes open for new dividend-payingfunds that
have launched.Fund companies, after all, also want to stay one
step ahead of the Federal Reserve. They are working hard right
now to provide new products that are appropriate for current and
future economic and market conditions -- and temptincome
investors like you and me.
Action to Take -->
In my upcomingissue of the
The Daily Paycheck
, I'll be profiling a brand newbond fund that offers a unique
kind of interest rate protection. But most of all, I will do what
I have always done.
I will reinvest my dividends in solid securities with good track
records for providing a stable and/or growingdividend stream. On
days when the market dips, I'll have the opportunity to reinvest
to purchase moreshares at lower prices and higher yields. And
every month, I'll have more shares generating even more
No matter what Bernanke says -- or how the markets parse
his words -- his goal it to get to a highly functional economy.
And in the end, that will benefit all securities.
The Culinary Institute's souffle station may have been
stressful and hectic. But when I had the rare opportunity to dine
at the Escoffier Room, I assure you -- my souffle was always