Fed Chair Janet Yellen Testifies

Fed Chair Janet Yellen testified on Tuesday and Wednesday, stating it would be “several months” before the Fed expects to raise interest rates. She noted that interest rate hikes will be considered “on a meeting by meeting basis” before adding that she does not expect to see the first rate hike for at least a couple of meetings. Short-term interest rate futures are showing that the market expects the first rate hike in September and did not change based on Yellen’s testimony. She also stated she believes the economy is nearing full employment. Once full employment is reached, faster wage growth and, ultimately, inflation tend to follow. However, Yellen stated she believes that until full employment is reached, inflation will fall before it picks up. Ultimately, Yellen stated that a rate hike will be considered if the Fed is confident that inflation and the labor market are both improving as she attempted to buy the Fed a little “wiggle room”. The rate hike appears that it will not occur before June, though this is still data dependent. It will be important to monitor the upcoming FOMC statements and meeting minutes to attempt to gain a better understanding of when the rate hike will take place.

Jobless Claims Rise Unexpectedly:

For the week ending 2/21, jobless claims jumped to 313,000, much higher than the average economist estimate of 290,000. The 4-week average is up 11,500 to 294,500 but is still more than 10,000 below a month ago. This longer-term trend suggests employers are gaining confidence. It’s also worth noting that jobless claims can be very volatile, especially around the holidays. President’s Day was included in the last week, so we will monitor the longer-term trend going forward to see if it continues or is just an outlier.

U.S. Economy Cools in 4th Quarter:

U.S. economic growth slowed in the 4th quarter as Gross Domestic Product (GDP) – the broadest measure of goods and services produced across the economy – expanded at an annualized rate of 2.2%, weaker than the original estimate of 2.6% released last month. This was, however, a bit higher than the average economist estimate of 2%. Despite this somewhat disappointing GDP number, there were some positive signs. Business investment grew at a 4.8% rate, lower than the third quarter but still much higher than the average expectation of 1.9%. Consumer spending increased at a 4.2% annualized rate, helped by strong job creations and falling gas prices. Consumer spending accounts for about 70% of GDP. When we see both consumer and business demand increase as this report shows, production increases tend to follow. All told, this report shows promise for the 2015 outlook.

New Home Sales Steady Near Multi-Year Highs:

U.S. new home sales fell only slightly in January despite big declines in the Northeast U.S. (which was hammered with snow) while supply rose to its highest level since 2010. The Commerce Department said that sales dipped 0.2% to a seasonally adjusted annual rate of 481,000 units in January. Price concessions boosted sales, as the median purchase price fell 2.6% to $294,000. December’s sales pace was revised up to 482,000 units, the highest level since June 2008, from 481,000 units.  The stock of new houses available on the market rose 1.4% last month to 218,000, the highest level since March 2010. While this seems a bit high, it is important to recall that these inventories remain at less than half of what they were at the height of the housing boom. In a separate report, the Mortgage Bankers Association said its measure of loan requests for home purchases, a leading indicator of home sales, increased 4.6 percent last week, rising for the first time in six weeks.

College Savings Planning:

With so many college students graduating with large amounts of student loan debt, clients often ask us how they can help plan for their child or grandchild’s college tuition. While it is possible to simply write a check, there are more efficient ways to help. Savings plans vary from state to state, but often times the best vehicle available is a 529 Plan. A 529 Plan is a state sponsored college savings plan that allows the account owner (parent, grandparent, etc.) to contribute to an account earmarked for higher education savings for a designated beneficiary. In Missouri, this plan is called the MOST 529 Plan. Below we have prepared some quick points regarding the advantages of opening (or contributing to) a 529 Plan:

• The earnings in a 529 Plan grow tax-deferred.
• Distributions are federal income tax-free (and in most cases state tax-free), so long as they are used for qualified higher education expenses (like tuition, room and board, books, etc).
• 529 Plans offer gift and estate tax benefits to the contributor. Individuals can contribute the annual gift tax exemption amount of $14,000 ($28,000 per married couple) to any number of beneficiaries. To utilize the five year contribution election, an account owner may contribute up to $70,000 ($140,000 per married couple) per beneficiary in a single year without incurring any gift taxes. Except for any prepaid portion of this accelerated gift-tax benefit election, the account values of 529 plans are not included for estate tax purposes.
• 34 states (Missouri included) offer additional tax benefits for residents by allowing a state income tax deduction on all or a portion of the amount contributed to that state plan. In Missouri, contributions are deductible up to $8,000 ($16,000 for married couples). 529 Plans do not have any residency requirements, so you are able to choose a plan from any state based on your specific needs. Only a handful of states (including Missouri) offer tax parity which allows tax deductions for contributions to out of state plans.
• The 529 Plan is considered to be an asset of the owner (not the beneficiary, i.e. the child) and therefore has a lower weighting in financial aid eligibility formulas.
• 529 Plan assets can be used at any U.S. school and is not restricted to a school in the state in which you establish an account.
• Anyone can contribute to a 529 Plan. So if a parent opens a 529 Plan for their child, the grandparents, other relatives, or even non-relatives can all contribute to the account.
• Depending on the plan, a variety of investment options are available.
• Unlike a Custodial account, a 529 Plan is property of the owner (the parent/grandparent) and not the beneficiary (the child). Therefore, the beneficiary can be changed, should the child receive a scholarship or simply choose not to attend college. The Plan is also fully revocable, meaning the owner can “re-claim” their assets, should they decide the plan is no longer necessary (though taxes are due on the gains).

We encourage anyone considering to help out with a child’s or grandchild’s higher education expenses to establish a 529 Plan, for the tax and estate planning advantages. To open a Missouri MOST account, one will simply need to visit the Missouri MOST website and complete their online application. We would caution against using “Target Date” funds that are provided within the plan. These balance to an arbitrary risk tolerance, rather than to your specific risk tolerance/liquidity needs. Feel free to give us a call if you would like to discuss this further.

 

This publication is provided as a service to our clients and associates of PFA solely for their own use and information. The material is derived from sources believed to be reliable but its accuracy and the opinions based thereon are not guaranteed and have not been verified. The content in this publication is for general information only and not intended to serve as individual investment advice. You should seek independent advice from a professional based on your individual circumstances.