Will 2014 Mean the End of ‘Cheap Money?’

Despite strong trending, the economy may not be able to sustain itself just yet

Mar 25, 2014 at 1:30PM

Janet Yellen may be a departure from recent Federal Reserve chairpersons, but she recently showed her relative inexperience as she stumbled through her first press conference. Failing to clarify previously made comments on the health of the U.S. market, bond markets fell as the new chairwoman's offhand remarks helped drive the Dow Jones Industrial Average down nearly 150 points.

Make no mistake, Yellen is an excellent economist, but the garbled message she delivered to the public begs the question: will 2014 be the year when the U.S. cuts its supply of cheap money? 

What's cheap money?
Cheap money refers to a market condition in which a given economy seeks to stimulate growth by creating employment opportunities. This is accomplished by lowering reserve requirements for banks (that is, the amount of money banks need to have on hand to cover day-to-day transactions), which in turn allows banks to give out more credit in the form of loans. Aided by lower interest rates, cheap money is great for a struggling economy, but less helpful for naturally growing economies (as it can potentially lead to economic bubbles). 

The economy has been rebounding since the beginning of 2014. With wages up and 175,000 new jobs created in February, American markets seem to be warming themselves up nicely in the wake of deep snow and miserable weather. With the ongoing taper potentially ending late this year, one could argue that interest rates need to rise to give the economy room to expand, without an artificial boost from monetary policy.

Given that the 175,000 jobs created last month represents a three-month low (and this workforce expansion came in the face of the weather), the economy is definitely on a good path. With unemployment falling below Yellen's benchmark of 6.5% (although this has recently been abandoned in favor of a currently unknown figure), the economy is recovering, but it may not be time to consider raising rates.

Is that such a bad thing?
That being said, Federal Reserve recent reports indicate that it will raise rates by at least 1% by the end of 2015 and to 2.25% by the end of 2016. While this does not seem like a marked increase, this would make U.S. bonds more attractive, at least in the short term. Short-term yields are already up to a 6-month high of .448%, but with longer-term bonds more minimal in their growth, investors are worried that a rise in interest rates will slow inflation in the long term.

While low inflation is good, having inflation too low will stagnate the economy and remove the forward progress the Fed's moves have made in recent months. With U.S. inflation at just over 1% in February, the recent surge in the economy may not yet be enough to create a self-sustaining cycle. That is, government intervention (in the form of low rates) may show the economy to be less strong than it seems, and allow for another slowdown. 

Is 2014 the end of cheap money?
In my opinion -- no. The U.S., though continuing to recover, is not yet ready for raised interest rates. This is not the fault of Yellen's comments, although her remarks did expose the tenuousness of the economy. Rather, this is due to unmanageable factors such as the weather (still affecting areas of the country with freak snowstorms and adverse conditions). 

What 2014 may be is a barometer for measuring the potential for future interest rates. 2015 may be the year to tighten the money supply, but higher Federal rates now may not be the best medicine for our economy.

The next step for you
Want to profit on business analysis like this? The key for your future is to turn business insights into portfolio gold through smart and steady investing … starting right now. Those who wait on the sidelines are missing out on huge gains and putting their financial futures in jeopardy. The Motley Fool is offering a new special report, an essential guide to investing, which includes access to top stocks to buy now. Click here to get your copy today -- it's absolutely free.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers