The potential impact of a monetary policy shift

The Federal Reserve is considering a changing its monetary policy framework from flexible inflation forecast targeting to one of several strategies known as make-up strategies.

What does this potentially mean for markets and the economy? I delve into the potential impact in this post, the final in a series of blog posts on the Fed’s potential shift. See my earlier posts on the reasons for this review and what options the Fed is considering.

A few common themes emerge when comparing the efficacy of the Fed’s current monetary policy system with the potential of the make-up strategy alternatives under consideration, including average inflation targeting (AIT) and price level targeting (PLT). Extensive studies on this topic have been done by the Fed and academics outside of the central banking world. Thousands of model outcomes can be summarized into four main features of make-up strategies.

  1. The economy returns more quickly to a steady state (where inflation is at target and the output gap is closed) after a downturn.
  2. Interest rates would likely stay lower for longer. If the Fed had adopted any one of a number of make-up strategies after the global financial crisis, it would probably not have started to raise rates from post-crisis lows – even by now.
  3. Macroeconomic volatility could decrease.
  4. Asset bubbles could become more common – unless macro prudential rules are tightened when make-up strategies are in place.

See the table below for a more detailed look at how financial markets could respond to three potential scenarios.

Sources: BlackRock Investment Institute, June 2019. Notes: This table shows our assessment of how financial markets may respond to the implementation of a new Fed policy framework if the framework is perceived to be credible. PLT refers to price level targeting. AIT refers to average inflation targeting. Forward-looking estimates may not come to pass.

The current U.S. expansion could have years more to run if a new strategy were implemented. This is because the willingness to consider make-up strategies suggests lower-for longer interest rates and therefore a bias toward easier rather than tighter monetary policy – and a lower chance that a policy mistake could cut short the expansion. But other potential risks to the recovery would need be monitored closely because financial vulnerabilities would likely build up faster.

If the Fed decides that a make-up strategy should be implemented, we believe that the future chance of extreme macro outcomes – especially a recession deepening into a full-blown depression because of a lack of monetary policy firepower – may be reduced. This is because the interest-rate floor may not become a limiting factor as often. The risk of full-blown deflation would also decline, in our view. The lower chance of these negative events – combined with lower-for-longer interest rates and higher long-term inflation expectations – would likely support risk assets.

icon-pointer.svg Read more macro insights in our Macro and market perspectives.

Volatility – currently low by historical standards – could also change. Medium-term macroeconomic volatility would likely decline under credible make-up strategies. Volatility could also rise in the short term while the market digests any new Fed inflation strategy. Effective Fed communication would be needed to manage this transition.

But in reality, any actual implementation of AIT (or other make-up strategies) is likely to be diluted. As the Fed’s Richard Clarida said in May this year, “our review is more likely to produce evolution, not a revolution, in the way we conduct monetary policy.” The more central bankers say there won’t be a big change, the lesser the likely impact.

Policymakers may only introduce a new strategy during the next downturn. They may also be wary of financial overheating and the resulting risks to financial stability. Importantly, AIT depends on the successful manipulation of inflation expectations, something central bankers have been unable to effectively do during this economic recovery. Some of the make-up strategies being proposed – such as “temporary” or “targeted” PLT – could suffer from time inconsistency issues relating to the challenge of central banks to pre-commit to a specific policy promise. A final consideration: AIT would be undermined if it were implemented without specifying the steps that would be taken to bring about inflation overshoots.

Our bottom line

The actual impact of a change in the Fed’s monetary policy playbook may only be a shadow of what AIT and other make-up strategies promise on paper – unless the change in the strategy comes with an upward adjustment to the inflation target itself.

Elga Bartsch, PhD, Head of Economic and Markets Research for the BlackRock Investment Institute, is a regular contributor to The Blog.

Investing involves risks, including possible loss of principal.

Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments. Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.

International investing involves special risks including, but not limited to currency fluctuations, illiquidity and volatility. These risks may be heightened for investments in emerging markets.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of June 2019 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader. Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

©2019 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

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Source: https://www.blackrockblog.com/2019/06/19/impact-of-monetary-policy-shift/

FAQ: Where should a new investor begin?

Welcome to FAQ!
We get questions from you guys all the time, about everything from asset allocation to interest rates to stocks to commodities. We thought this would be a great format to address some of these topics and give people some specific answers to things they’ve been wondering about when it comes to finance and investing.
In today’s edition, Michael Batnick, Ben Carlson and Downtown Josh Brown answer…

The post FAQ: Where should a new investor begin? appeared first on The Reformed Broker.

Source: https://thereformedbroker.com/2019/06/18/faq-where-should-a-new-investor-begin/

Integrating Roth IRA With Social Security Benefits

social security by Fabricator of Useless ArticlesThere are some great benefits to be had from converting funds from a traditional IRA or a 401k to a Roth IRA. But that doesn’t mean that everyone within earshot should just willy-nilly go off and convert their IRAs to Roth IRAs. One factor that many folks likely haven’t thought about is integrating Roth IRA with Social Security to reduce taxes.

Taxation of Social Security

As you may be aware, depending upon your “provisional income”, various amounts of your Social Security benefits may be taxable. At this time, for example, if your provisional income is more than $34,000 (or $44,000 for a married couple), then up to 85% of your benefits would be taxed. Less than $34,000 ($44,000 for a married couple) but more than $25,000 ($32,000 for marrieds), up to 50% of your Social Security benefit is taxable. Less than $25,000 ($32,000 for a married couple) and your Social Security benefit may be untaxed.

Provisional income is your adjusted gross income (AGI, the amount in line 7 of form 1040) plus tax-exempt interest earned for the year, plus ½ of the amount of your Social Security benefit. So the trick is to limit your AGI, in order to reduce the amount of Social Security benefits that are taxed, if possible. One way to do this is to generate income from a Roth IRA, which is not only tax-free, but isn’t counted toward the AGI.

A Tale of Two Taxpayers

Two taxpayers, Stevie and Christine, both age 62 and retired, have vastly different outcomes for their tax situations. For simplicity’s sake, we’ll say that both women are single, and are collecting identical Social Security benefits of $20,000, and that each has a total income requirement of $60,000 each year. In addition, each of the women has a pension available, which will either pay out a $40,000 payment each year, or is available as a lump sum for rollover at the amount of $600,000.

Stevie

Stevie decides to take the pension payments of $40,000 per year. Come tax time, she learns that she will have to pay tax on 85% of her Social Security benefit ($17,000) because her provisional income adds up to $50,000, which is above the $34,000 limit mentioned above. So the tax on this amount ($40,000 pension plus 85% of SS, or $17,000) is $5,714, or roughly 9.5% of her total income. Assuming that nothing changes about the situation, Stevie can count on paying around 9.5% of her income in tax for the rest of her life.

Christine – Option 1

Christine, on the other hand, takes a look at the numbers and decides that it might make more sense to attack the situation differently. She takes the lump-sum payout from her pension plan and rolls the money over into an IRA. If Christine were to simply leave things this way and start taking a distribution of $25,000 each year, she would have exactly the same tax treatment that Stevie is getting. However, if Christine should decide to do a conversion of the IRA to a Roth IRA in 2019, she would be paying tax of approximately $188,000, leaving her with a net balance in the Roth account of roughly $412,000.

Now Christine pays no tax (under current laws) for the rest of her life! Given that her provisional income cannot be more than the limits, her Social Security benefit will never be taxed. And since all of her income comes from the Roth IRA, there is no tax owed at all. But this is a very high price to pay up front – roughly 1/3 of her IRA account. Christine would need to take this tax-free income for around 32 years, as long as income tax rates stay the same. If the income tax rates rise, the break-even time would be less, of course.

Christine – Option 2

But what if Christine instead took her income requirement each year (the same as Stevie), paying the roughly 9.5% tax, but then took an additional amount from the IRA and converted it to a Roth? If she converts $50,000 in the first two years, the additional tax would amount to roughly $11,200 each year. Having done this for two years, Christine can take (for example) $5,000 of her required income from the Roth. The result is to reduce the amount of her provisional income to only $45,000, thereby reducing the amount of her Social Security benefit that is taxed each year to approximately 70%. Now Christine’s annual tax would be reduced to $4,204, a savings of $1,500 per year in taxes.

Christine – Option 3

What if Christine did the conversion of $50,000 for five years in a row, paying a total of $56,000 in tax? Her provisional income is now only $40,000, reducing the amount of her Social Security benefit that is taxed each year to approximately 50%. The difference, $10,000 each year, is taken from the Roth IRA at no tax impact. Now Christine’s annual tax is reduced to $3,094, a savings of $2,700 per year in taxes.

Summary

There’s a lot of math going on in this article! The point was to show how this Roth IRA conversion activity isn’t just a question for the rich. It can have an impact on folks at all levels of income. It can be very costly to do nothing! On the other hand it can be quite lucrative to do some planning for integrating Roth IRA with Social Security. As always, talk to your financial professional before making any dramatic moves, just to make sure you’ve got it right.

Note – for the purpose of illustration, I used current tax rates throughout the examples. I realize that rates are likely to increase in years ahead. This will only make the illustrations I’ve done here look better for the Roth conversion early on at our historically low rates (in most cases).

The post Integrating Roth IRA With Social Security Benefits appeared first on Getting Your Financial Ducks In A Row.


Source: https://financialducksinarow.com/1612/integrating-roth-ira-with-social-security-benefits/

Changing the Ratio

True story…

This is Muriel Siebert. Her friends called her Mickie. She was born in Cleveland, Ohio and made her first visit to the New York Stock Exchange in the early 1950’s. According to her autobiography, the trading floor looked like a “sea of men in dark suits,” but when she got home, she told all her friends that one day she would get a job there.
In 1954, Ms. Siebert got herself back to New Yor…

The post Changing the Ratio appeared first on The Reformed Broker.

Source: https://thereformedbroker.com/2019/06/18/changing-the-ratio/

A glimpse at our midyear outlook debates

Twice a year we gather BlackRock’s senior decision makers for a two-day forum on the market outlook and its investment implications. We debated many topics at our meeting last week in London, including what could spark a change in the macro backdrop and how to prepare portfolios for a wider range of possible outcomes. The implications will be reflected in our updated tactical asset allocation views, to be published in our midyear outlook on July 8. Below we give a glimpse of our debates.

The majority of midyear forum attendees saw the current benign environment for risk assets as having room to run. Most felt it could persist for at least 12 more months, given easy monetary policies and few signs of financial imbalances. Yet we saw a wider range of outcomes the current macro regime could eventually break into. A recession was just one of the possibilities debated. One risk scenario: a reversal of the globalization trend of past decades. This could disrupt global corporate supply chains, sap potential growth and lead to sticky inflation. Forum attendees generally agreed that worsening trade relations have heightened macro uncertainty and widened the range of potential scenarios. In a pre-forum poll of meeting attendees, nearly half of respondents said they see geopolitics as the dominant market driver in 2019, taking the reins from policy. See the highest 2019 line in the chart above.

A changing backdrop

Our conviction in a slowing expansion with more room to run has become stronger over the last six months. In the pre-forum poll, more than 60% of respondents said they expect a moderate growth slowdown and low inflation over the coming 12 months, versus just 40% foreseeing that scenario last November. We entered 2019 with a consensus expectation of a modest global growth slowdown with little near-term risk of a U.S. recession, though rising risks – including escalating trade tensions and fears of a recession – called for carefully balancing risk and reward via building portfolio resilience, in our view. (See our 2019 outlook). At the end of the first quarter, these risks remained, yet a Fed on hold; a slowing but still growing global economy; and a perceived reduction in geopolitical risks informed our expectation of a positive near-term backdrop for risk assets. (See our Q2 outlook). Since then, the risk of a trade war has intensified.

icon-pointer.svgRead more market insights in our Weekly commentary.

Escalating trade tensions and the uncertain knock-on effects on global supply chains are making many of us ponder the possible consequences. We now see this rising geopolitical confrontation as the greatest risk to the global expansion rather than traditional late-cycle concerns such as building financial imbalances. The sharp rise in trade and strategic tensions between the U.S. and many countries – including China and Mexico more recently – tilts growth risks to the downside, in the near term as well as the long term, according to many forum attendees. We debated exactly how it could play out; some saw a risk of weaker growth with higher inflation, and others expected weaker growth to remain disinflationary. Some BlackRock investors now expect G7 growth to slow more sharply in 2019 than we had anticipated coming into the year. Also creating uncertainty and adding to the range of possible outcomes: markets are currently pricing in significant interest rate cuts by the Fed – pricing that we see as aggressive.

Bottom Line

To refresh our market outlook, the conversations among the 100 BlackRock investors and decision makers gathering in London centered on certain crucial topics: the outlook for the Chinese economy; central banks’ likely path forward and their policy toolkit to face the next downturn; the future trajectory of inflation; and how to build resilient portfolios. The latter remains a key focus: A majority of BlackRock investors said they see portfolio resilience as more important than usual now. We will publish our midyear outlook on July 8.

Jean Boivin, PhD, is the Head of the BlackRock Investment Institute. He is a regular contributor to The Blog.

Investing involves risks, including possible loss of principal.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of June 2019 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader. Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

©2019 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

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Source: https://www.blackrockblog.com/2019/06/18/midyear-outlook-debates/

Is China too big to ignore?

In 1987, China’s gross domestic product, or GDP, was just shy of $273 billion. Sounds like a lot, right? Fast forward to 2017: GDP was over $12.2 trillion. That’s a greater than 4,000% increase. In the same timeframe, U.S. GDP increased roughly 300%.

In our recent podcast, “China: too big to ignore,” moderator Oscar Pulido quizzed me on the drivers behind China’s rapid growth, and the new opportunities for investors with the opening of China’s domestic markets. Below are some highlights from our conversation.

Pulido: Let’s talk about China’s growth. It’s actually really impressive when you think about what they’ve been able to accomplish over the last 30 years. What’s been the catalyst of that?

Shen: When we think about China, I tell people there are three things that are most important. It is government, government, and also … government. Ninety percent of the population lived below the poverty level back in 1979, earning less than $1.19 a day. Fast forward to 2019: Less than 1% live in this kind of extreme poverty. Policy has certainly been the most important driver. The second driver is that China joined the World Trade Organization (WTO) in 2001, which allowed China to open up to the rest of the world. China has transformed from a country in the ’60s and ’70s that was actually quite isolated from the rest of the world, to coming onto the world stage, whether it’s trade or investment. We’ve certainly seen extraordinary economic growth that we haven’t really seen in any other countries or at this type of scale in human history. So it certainly has been pretty phenomenal.

Pulido: Back in 2015, China’s President Xi Jinping unveiled the Made in China 2025 plan. What exactly are the details of that plan and is this also one of the reasons why we continue to see this extraordinary growth?

Shen: The mindset in China is that what got you here won’t get you there. So every five or 10 years, you have to do something that is fundamentally different. Made in China 2025 has emphasized that the country has to move from an emphasis on the quantity of the growth to the quality of the growth. And to go for quality, you need to have a lot of technology to enable you to swim up the value curve. There is quite a bit of discussion around electric cars, artificial intelligence, robotics and big data. But I don’t want people to get the impression that this is a new thing. China is actually pretty regimented about coming up with these five-year plans, 10-year plans, 20-year plans. And technology certainly has been in the DNA of the country. China produces one of the largest groups of science and engineering graduates in the world. I think it’s important to consider how this is actually not that much different from what the country has been doing for the last 30 or 40 years.

Pulido: When you think about the investment opportunity in China, actually buying companies in China, is there a compelling case there, similar to the one you’ve made around the economy?

Shen: The exciting thing that happened in 2018 was the MSCI inclusion of the Chinese A-shares market into the global equity market. Historically, this is certainly a market that international investors have had very little access to. Most of the holdings have been through domestic institutions, and importantly, domestic retail investors. And so that is a big deal in my mind. This represents around $8 trillion in market cap, give or take. That’s a big market that is opening up to the rest of the world. There are 2,000-plus stocks listed, and the market trades around $40 billion to $50 billion a day. For investors who want to tap into the growth story of China, I think it certainly presents a pretty rich opportunity set.

Pulido: In your role, being able to access consumer data is an important part of how you analyze the investment opportunity set. How do you use big data to understand investment opportunities in China?

Shen: China certainly is a great playing ground for using big data and artificial intelligence to gain a bit of investment insight. Through social media, you can get a sense of sentiment among the 130 million retail investors: Are they loving the stock market? Are they worried? This information historically was never available because people never blogged or Tweeted about what they like. But today, in aggregated form, you can get a sense of overall market sentiment. We can use some of this new, alternative data to enrich our understanding of the market. But I also think a lot of it is about asking the right questions, and making sure that alongside the new set of data, we ask interesting and relevant investment questions. Hopefully, we can use these new data and tools to gain a bit of an edge.

Listen to the full podcast here, and don’t forget to subscribe wherever you listen to your podcasts.

Jeff Shen, PhD, Managing Director, is Co-CIO of Active Equity and Co-Head of Systematic Active Equity (SAE) at BlackRock.

Oscar D. Pulido, CFA, Managing Director, is the Global Head of Product Strategy for Multi-Asset Strategies (MAS) at BlackRock.

Investing involves risks, including possible loss of principal.

This material is for informational purposes and is prepared by BlackRock, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of date of publication and are subject to change. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable and are not guaranteed as to accuracy or completeness. This material may contain ’forward looking’ information that is not purely historical in nature. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not indicative of current or future results. This information provided is neither tax nor legal advice and investors should consult with their own advisors before making investment decisions. Investment involves risk including possible loss of principal.

© 2019 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.

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Source: https://www.blackrockblog.com/2019/06/17/is-china-too-big-to-ignore/

I did everything I was supposed to do

They called me in to the conference room on Friday morning, ahead of Father’s Day weekend. “Have a seat, Dave…”
I sit.
The whole thing happens in fifteen minutes. I have til the end of the day to say my goodbyes. I have none that I want to say. They tell me to get my stuff together – two framed pictures, one of my kids and one of the four of us at my son’s high school graduation, I don&…

The post I did everything I was supposed to do appeared first on The Reformed Broker.

Source: https://thereformedbroker.com/2019/06/16/i-did-everything-i-was-supposed-to-do/