ACTIONS SPEAK LOUDER THAN WORDS
A couple of weeks ago the Federal Reserve decided to keep short-term interest rates unchanged. The Fed cited further signs of slower economic growth and more rapid gains in productivity. Predictably, the Fed left the door open for another interest rate hike sometime down the line, saying that risks remain weighted toward conditions that may generate higher inflation.
For the Fed this is an ongoing soap opera. Their decision to do nothing this time around had been widely expected-it marked the second straight policy meeting in which the Fed has left interest rates steady, following a year in which they had six times bumped interest rates just a little bit higher for a total of I 3/4 points. It's the same old story from the Fed; 'We'll do nothing now, but don't feel too comfortable, because we might do something later.'
That is the point I have been trying to make all along. The Fed Chairman SIMPLY IS NOT GOING TO SAY, 'WE'RE DONE.' He's will always say, 'We're still on guard, we're still nervous.' And to some extent, it's good that he is, because that's our protection against a revival of inflation.
A closer look at the Fed's comments coming out of the late August meeting; they noted that recent data indicated that the growth of demand is moderating towards a pace closer to the rate of growth of the economy's potential to produce. Data indicated that more rapid productivity gains have been raising the economy's potential growth rate, as well as containing costs and holding down underlying price pressures.
All this is following the rather orchestrated play that Mr. Greenspan intends. The next Fed Open Market Committee meeting is on October 3rd, and most people feel that unless a serious problem develops, the Fed would not raise rates a month before the election. It would seem politically motivated. The final two Fed meetings of the year are November 15th, and December 19th. My bet is that the Fed is done for the year. My suggestion to clients, readers and radio listeners alike is to stop listening to the Fed rhetoric. Watch what they do, don't listen to what they say, and I think everyone will get a clearer picture of what's actually going on.
On a completely different subject; there's a bill introduced in Congress by Representative Jim Saxton, Republican from New Jersey; no lightweight, he happens to be the Chairman of Congress' Joint Economic Committee. The bill would allow mutual fund owners to avoid a certain amount of capital gains taxes, if the investors automatically reinvest capital gains distributions directly back into their mutual fund. The bill would allow a deferral of up to $3,000 or $6,000 for couples. Payment of the capital gains taxes would then only occur when the fund owner sold the mutual funds.
As many of you are probably aware, fund owners often pay taxes annually on capital gains or profits from the sale of stocks within their funds. Mutual fund capital gains are assessed despite the fact that the investor or fund holder has nothing to do with the sale since it was instigated not by the fund owner, but by the mutual fund manager. There are even times when fund owners may find themselves paying capital gains taxes at the end of the year on a fund whose shares have actually declined in value. Representative Saxton correctly says, "Our tax code has many features that are economically counterproductive, but few are as destructive as those aimed at personal savings and investments." Saxon's statement continued; "The current law forces middle-income savers and investors to pay on capital gains they have not realized. Even if the value of their shares has declined or they've owned them only for a short time, they can be slammed with a huge tax liability." This tax can reduce a rate of return by 10% or 20%. Investors would benefit even if they eventually sold their shares after holding them for several years. That's because long-term capital gains are taxed at 20%, whereas short-term gains are taxed at a higher 28% rate.
The key on all this is that with a hundred million stock owners in the country today, this is the beginning of a new trend where politicians are going to be more sensitive about doing things that benefit savers and investors.
(Tom Butenhoff is a First Vice President with J. E.
Liss & Company in Milwaukee. The views are his and not necessarily
those of Liss Financial Services or the Job Connection/Hiring
Network.)