Making Cents: Fed moves have ripple effect

The Federal Reserve Bank, led by Ben Bernanke, has a dual mandate to take measures that will stimulate employment and keep inflation in check. The tactics deployed have been affectionately titled quantitative

easing or QE for short. QE really means the Federal Reserve is injecting money into the economy by printing new money and using these freshly minted greenbacks to buy bonds.

This is not the time to evaluate the QE program. But this is the right time for an assessment of the consequences of the Fed actions.

Whether Wall Street or your home, nearly everyone has benefitted in one way or another from the QE program. For those brave enough to invest in US equity markets, you were rewarded. For those brave enough to purchase real estate while the sky was falling, you are being rewarded. And for those who decided to be safe, and stay with the shelter of guaranteed bank like accounts, you were punished with low rates, higher taxes and returns that are actually negative after taxes and inflation.

I expect the adverse consequences for savers to continue. The Fed has indicated that it doesn’t see the need to raise short term borrowing rates until mid 2015 yet mortgage rates have already risen and the US tem year treasury bond has risen rather substantially from a low of around 1.6 percent to as high as 2.4 percent. . The consequence of that is not pretty for fixed income investors. As interest rates rise, the values of your fixed income holdings actually fall. At this point in our economy, I suggest you be very careful about adding to your fixed income holdings.

Mortgage rates have also risen in the past several weeks. So far, these rate increases do not seem to have dampened the recent heat of the real estate markets. But just like New England weather, wait a minute and it may change. While I’m not suggesting another crash in home prices, I am suggesting that you avoid over exuberance with any home purchases that are not geared for the long term.

 John P. Napolitano is CEO of U.S. Wealth Management in Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at jnap@uswealthmanagement.com or on Facebook as JohnPNapolitano and US Wealth

John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.

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