Federal Reserve’s Bullard Issues Caution

St. Louis Federal Reserve President James Bullard suggested there may be serious consequences in the market if the disconnect continues between the market’s expectation for the timing of rising interest rates and when the Fed actually does raise rates. His belief is that the longer the market goes without adjusting for rising rates in the future the greater the possibility of a correction. “I think reconciliation between what markets think and what the committee thinks will have to happen at some point….That’s a potentially violent (encounter)….and I am concerned about that. I am hopeful that markets and the policy committee can come to some kind of meaningful meeting of the minds in the coming months and quarters.” Bullard said a rate hike should occur at some point this summer, while monetary policies would continue to remain accommodative.

We anticipate that financial markets will remain volatile while the Federal Open Market Committee (FOMC) continues to debate on when to start raising the Federal Funds rate. Until we get more clarity on an exact date, every piece of macroeconomic data will be scrutinized even more closely by investors as they will attempt to determine how the data will affect the Fed’s decision. While we do not expect any clear guidance from the Fed over the next few weeks, we do expect investors to shift their focus from macroeconomic and geopolitical headlines to corporate earnings. The unofficial kickoff to each earnings season is when Alcoa (AA) reports earnings. Alcoa is expected to announce their first quarter earnings on April 8th. The guidance provided by corporate executives should provide more insight into overall business confidence going forward. We believe that corporate earnings in general will be positive, but we also anticipate that many U.S. corporations will site harsh weather conditions and the appreciating dollar as headwinds in the 1st quarter.

New Home Sales Rise:

The Commerce Department announced that new home sales surged 7.8 percent in February, reaching the highest level in seven years. The seasonally adjusted annual rate was 539,000 units, compared to forecasts of 462,000. A sustained pickup, along with existing signs that there is already a shortage of homes on the market, could lead to a rise in new construction as builders look to fill the void. As more new homes are built, more jobs are created and the demand for building materials, as well as home furnishings (like appliances, furniture, etc) all creates a trickle-down effect that can snowball and really take hold of the economy’s momentum. As the weather turns nicer, it will be important to monitor both existing inventory, as well as new home sales to get a better gauge of the economy’s overall health and direction.

Eurozone Economy Shows Improvement:

Business activity in the Eurozone hit its highest level in nearly four years, which suggests that the region is slowly improving. The European Central Bank (ECB) released data on Thursday showing that lending to firms and households rose in February, signaling the ECB’s stimulus plan is beginning to lift the economy. Low oil prices, a weak euro, and the European Central Bank’s (ECB) quantitative easing program should all continue to act as tailwinds for these economies. Greece’s debt negotiations with their northern neighbors continued this week with no new resolutions put forth. The potential Greek exit from the Eurozone will continue to flood headlines until they get a new deal on the table. However, most investors seem to be desensitized to new headlines on Greece and most analysts believe that it is likely that a deal will get done and that they will remain in the Eurozone.

Oil Prices Remain Volatile:

Oil prices have been volatile for some time now, and this week was no exception. Thursday, oil prices rose as Saudi Arabia ordered an air strike on Yemen. While Yemen is not a major oil producer, any unrest in the Middle East generally fuels (no pun intended) fears of a decrease in supply of oil. This is especially true of Yemen, as concerns that a lasting conflict will block the Bab el-Mandeb Straight, a major oil transit post between the Suez Canal and the Persian Gulf. However, today saw oil prices give back those gains, as talks between the U.S. and Iran seemed to be progressing. The U.S. currently has economic sanctions placed on Iran which limit the country’s ability to export oil. It is looking more and more likely that these sanctions will be lifted, with some analysts predicting a resolution within days. Iranian oil returning to the market would certainly increase oil supply in a market that is already oversupplied. Depending on how quickly Iran sends oil into the market, as well as how much, the price of oil could see additional downward pressure.

Required Minimum Distribution Deadline:

April 1st is the deadline for those who turned 70 ½ in 2014 to withdraw their first required minimum distribution (RMD) from their qualified retirement plan accounts. Distributions are required to be taken from these accounts once the account owner turns 70 ½ (if your 70th birthday is on July 1st or later you will not be required to take your first distribution until the following year). For the first RMD, however, the account owner has until April 1st of the following year to take that distribution. Each RMD thereafter is due to be taken by December 31st. For instance, an IRA account owner who turned 70 ½ during 2014 can delay their first RMD until April 1st, 2015, but will have to take their 2015 RMD by December 31st, 2015. The penalty for failure to take an RMD is 50% of the portion of the RMD not taken.

RMD rules apply to all types of IRAs, but rules for defined contribution plans (e.g. 401(k), 403(b)) can vary for those who turn 70 ½ and are still working. If their plan permits, an individual that turns 70 ½ and is still working does not have to start RMDs from their defined contribution plan until they retire.

The calculation for determining the amount of RMDs is based on the balance of the IRA or retirement account at the end of the previous year, divided by a life expectancy factor provided by the IRS. The RMD is then recalculated every year thereafter based on the new year-end balance of the account divided by the updated life expectancy factor for the owner’s age. For those with a spouse that is at least 10 years younger, a Joint Life and Survivor expectancy table can be used to calculate the annual RMD.


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