What happens to the economy when the Federal Reserve Tapers and trys to raise interest rates.

If you have been following the markets at all you know how much influence the Federal Reserve (FED) has on the markets and government policy.  Over recent years the fed has been the only thing that has prevented the collapse of the financial system.  The easy money policy has made it possible for the Democrats in Washington to spend with abandon without worrying about interest rates going higher on government treasury bonds.  The bond buying program has pushed interest rates down on three year treasury bonds to just 0.78% at the end of 2013.  Since then interest rates have increased to 0.93 today April 2014.  These low rates are great for borrowers and bad for lenders.  Most people think of it terms of how much will it cost me personally when interest rates increase when the FED stops buying bonds to prop up the market.  Well when you think of interest rates.  You should think how will Washington DC react when rates start to return to a more normal interest rate world where the FED distortion is removed. 

Today the FED’s Jenet Yellen raised the employment bar by setting the expectation for raising interest rates with a new target rate for unemployment from 6.7% to 5.2 -5.6%.  She stated that the job market isn’t as strong as she would like to see.  The market responded with the Dow jumping 150 points nearly 1%.  This means easy money for the foreseeable future probably the next two years.  So You can bet that interest rates will remain at 0 or below.  Keep in mind when I say below I mean bond buying program which is still in effect for the next 6 to 9 months. 

The Government loves it.  It puts off the day of reckoning on the nation’s deficit.  Here is my bold prediction about that.  The FED will never be able to raise interest rates until the US government gets it deficit under control.  So in other words rates will never be allowed to go up because the government simply can’t allow it.  If the FED allows interest rates to rise the government will step in to prevent it.  Thereby forcing the FED to keep rates artificially low even as the economy heats up. 

Probably the best place to be with your assets when this happens is in the stock market and cherry picking quality bonds that are solid where the majority are crap.  The best way to invest in stocks is to either pick them yourself and watch them or find a fund with quality managers with low management fees.  On the bond front you will want to avoid picking individual bonds yourself. You will definitely want to choose a quality bond fund manager.  Here is where it might be better not to look at the fees as closely.  Because if the bond market is hit hard you will want quality bonds and you probably aren’t savvy enough to find the diamonds in the rough.  From here going forward you must be a picker and not investing in index funds and ETFs.  Because in these investments you buy the good performers along with the worst.    But you don’t want to hang your hat on the FED or Washington DC doing the right thing.  Because you may just find yourself holding the empty bag of promises of hope, freedom, and security.

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