Shame on Congress for its past debt battles; but shame on us
if we get fooled again. Political brinksmanship resulting in the
government shutdown may yet again undermine financial market
confidence as the upcoming
debate holds even greater significance, as
I wrote recently
in my October monthly "Fool Me Once," and my colleague Russ has
discussed as well
. While the government shutdown makes a compromise harder to
imagine, the much more negative consequences of failure to raise
the debt ceiling make the need to reach a compromise on the debt
In this anxiety-filled environment, what helps keep the
economy on the recovery path?
Answer: "financial market conditions," something the Fed has
been concerned about lately. Indeed, the Fed
surprised markets by maintaining its full
rather than reducing it, as had been expected. Why?
Well, the rise in interest rates following the
Fed's May-June comments on "tapering" appears
to be the reason for the
Fed's surprising decision
to defer the reduction in its quantitative easing bond
The broader definition of "financial market conditions" refers
not only to interest rates but also housing and stock markets and
has been the main source of support for the recovery thus far.
Specifically, that support has been in the form of a
wealth-induced incentive for spending. The Fed knows this and is
The chart below highlights this relationship. Savings rates
reflect the mirror image of rising wealth: as consumers feel
wealthier from rising stock, bond and housing values, they tend
to spend more - and save less. That spending comes about not from
rising incomes but as consumers are saving less.
But rising wealth generally influences higher spending through
to spend. Absent a return to the HELOC (home equity
lending) frenzy of the pre-crisis days - an unlikely outcome
anytime soon - rising wealth can support consumption only so
Ultimately, the strongest contributor to consumers' spending
to spend, and that comes from rising incomes. But those
figures have yet to rebound higher following the crisis, as
detailed in the chart below.
What does this mean for investors?
Low for longer
." The Fed's need to keep the recovery moving forward through its
financial market conditions formula means that interest rates
must remain low - for longer than many in the market had
Jeffrey Rosenberg, Managing Director, is BlackRock's
Chief Investment Strategist for Fixed Income, and a
regular contributor to
You can find more of his posts