The recovery is more than 4 1/2 years old, and up until now has depended upon life support from the government. It has been argued with good evidence that the extraordinary intervention has now progressed beyond any beneficial contribution and has instead become something of a hindrance, owing to the uncertainty of fiscal policy and the distortions of monetary policy.
Thankfully, we may be on the cusp of a return to normalcy this year.
Businesses have been understandably reluctant to commit investment capital when so many unknowns persisted. Critical factors like tax rates and aggregate spending levels that influence expectations for economic growth were, until recently, subject to legislative brinksmanship and repeated temporary reauthorizations. Remarkably (and somewhat surprisingly), this is much less true today and therefore the investment climate has brightened measurably. Congress negotiated a bipartisan two-year budget agreement, and then passed by overwhelming majorities an appropriations bill to implement the budget for 2014. And as we sit here today, the odds of another dangerous confrontation over the debt ceiling are much diminished. This admittedly modest return to regular order in Washington seems to have provided a boost of confidence to CEOs pondering the best use of their considerable cash reserves.
Meanwhile, and at long last, monetary policy seems headed back in the right direction as well. Having expanded its balance sheet by over 400 percent in battling the risk of financial Armageddon, recent Federal Reserve actions to stimulate borrowing activity have long since passed the point of diminishing returns, and are presently creating more distortion than assistance. Hence the announcement by outgoing Chairman Ben Bernanke that the Fed's bond buying will decline systematically, beginning in January and presumably ending completely before year-end.
This too is excellent news. Although the diminution of intervention triggered an immediate increase in interest rates, the bond market ultimately got a hold of itself and is now discounting an orderly and quite manageable increase in rates throughout 2014, with the 10-year Treasury bond arriving at around 3.5 percent by December. Lest we forget, that is still lower than the prevailing rate at the end of the Great Recession and ranks among the lowest levels in history.
Good news for a broad class of Americans who have felt the pain of ultra-low rates: savers. Conservative investors and retirees on fixed incomes have been painfully aware of the dearth of opportunities for income without taking on additional risk. One day in the not-too-distant future, it may be actually worth your time to tootle down to the bank to check on CD rates.
Good news also for the broader U.S. economy. Ending forced intervention and allowing market forces to move rates is likely to have the additional benefit of a stronger dollar, helping to keep already low inflation in check as the economy picks up speed. Alas, bad news for gold.
Given these developments, 2014 could be the year in which growth at last approaches a more agreeable rate consistent with better job creation and higher real wages. It's about time.
Christopher A. Hopkins, CFA, is vice president at Barnett & Co. Advisors.
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