Amid all the noise that typically surrounds anything the Board of Governors of the
Federal Reserve does, it might be easier simply to think of Fed Chairman Ben Bernanke as your personal investment adviser.
While he may not have full discretion over your portfolio, he is making some very strong suggestions as to how you should be investing and allocating your assets.
Last week's announcement that short-term interest rates likely will be held at near zero until at least late 2014 was just the most recent nudge by Mr. Bernanke to encourage investors to start embracing more risk.
Essentially, whether you are defined as a saver living on a fixed income or just a really nervous investor, the Fed is underscoring the fact that the safest investments won't come close to keeping up with inflation.
Of course in addition to his role as your investment adviser, Mr. Bernanke is also dealing with that other pesky role of trying to manage the nation's inflation and employment levels.
Thus, last week's announcement was another in a string of moves by the Fed that has seen short-term rates pushed to zilch, followed by two rounds of quantitative-easing bond purchases, and a statement last year that rates will be kept down until at least 2013.
And to make sure you don't try to circumvent the Fed's efforts by exchanging your short-term Treasuries for longer-term Treasuries, Mr. Bernanke has installed “Operation Twist.”
The $400 billion program involving the sale of short-term Treasuries and the purchase of longer-term Treasuries is set to end in June, thus driving down principal values of those bonds as yields on longer-term Treasuries likely rise.
This is on top of the potential effects of inflation, which also would drive down the values of longer-term notes, boosting their yields.
Now, it might be easy to sit back and criticize your investment adviser for such a heavy dose of tough love in forcing you to take on added risk. But if we're truly going to embrace this fanciful notion of Mr. Bernanke as your investment adviser, we might as well take advantage of his tremendous insight and influence over the asset classes in which he clearly wants you to invest.
Try not to dwell on the idea that a long-term low-rate policy sort of feels like the Fed isn't expecting much of anything from the economy for the next few years.
It's better to just follow his advice and take what he's giving you. Everyone knows you can't fight the Fed.
