Amid A Swirl Of Controversy, Fed Policy Remained Stable

Despite the double-digit plunge in stock prices in October and rebukes by the President, the Federal Reserve Board isn't changing course. Despite unusual turbulence, Fed policy remained stable and steady.

Two days after pivotal midterm federal elections and two weeks after an 11% drop in the Standard & Poor's stock index, the Fed's Nov. 8 monthly monetary policy news-release repeated its long-held strategy for controlling rates and inflation.

Despite the stock market plunge and unusually direct criticism of the Fed by President Donald J. Trump, the U.S. central bank policy remained unchanged. "The Committee decided to maintain the target range for the federal funds rate at 2% to 2.25%," said the Fed statement. Amid a swirl of controversy, Fed policy has remained stable.

The Fed raised rates by a quarter-point three times so far in 2018, most recently on September 26. On October 10, after a sharp selloff leading up to the double-digit correction, Mr. Trump, at a campaign rally said, "The Fed has gone crazy." On October 16, after stocks had dropped following a decision by Fed Chairman Jerome Powell to hike rates by a quarter-point, Mr. Trump said on Fox Business News that the Fed was "out of control." Presidents have jawboned Fed chairs before, but this was unusually blunt. "Every time we do something great, he raises the interest rates," Mr. Trump said in The Wall Street Journal on October 23, adding that Mr. Powell "almost looks like he's happy raising interest rates."

For many months, the Fed repeatedly said inflation was tame and would remain so, but it expected to raise rates four times in 2018 to keep the economy growing without triggering a cycle of rising wages and prices. In the second- and third-quarter of 2018, the economy grew faster than expected. However, wage inflation was muted by productivity gains, which is about the best economic news you could ever ask for. Productivity is the secret sauce of a nation's economy.

Meanwhile, Fed chair, Mr. Powell, in Boston in early October, offered evidence to support a low-inflation outlook for the next decade, along with modest but sustainable growth. This week's survey of purchasing executives in non-manufacturing companies— accounting for 88% of U.S. economic activity— dropped just slightly from the all-time record high in August. Purchasing at 88% of private economy remains near an all-time high since this data was first collected a decade ago. A decade is not that long a history, but this index is modeled on a manufacturing survey that stretches back many decades.

The double-digit market correction of October that halted only a week ago, became a rally after the midterm elections. Markets are said to abhor uncertainty and that risk is history now. The Standard & Poor's 500 closed on Friday at 2781.01, just 5% off its all-time high, and 2% higher than a week ago.

No one can predict the future, but the economy shows no sign of recession and October's correction seems so long ago.

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This article was written by a veteran financial journalist based on data compiled and analyzed by independent economist, Fritz Meyer. While these are sources we believe to be reliable, the information is not intended to be used as financial or tax advice without consulting a professional about your personal situation. Tax laws are subject to change. Indices are unmanaged and not available for direct investment. Investments with higher return potential carry greater risk for loss. Past performance is not an indicator of your future results.

Reduce Your Widow's Tax Bill Materially Annually

This is a good time to consider converting a traditional individual retirement account into a Roth IRA. Tax rates are low but unlikely to stay that way. Here's a long-term strategy that takes advantage of the current tax policy and economic fundamentals - a tax-efficient retirement investment and avoids a new twist in the Tax Cut And Jobs Act that penalizes widows.

The Rules. With a traditional individual retirement account (IRA), taxes on gains reinvested are deferred. An IRA grows with no taxes owed. When you retire, withdrawals are taxed as income. A Roth IRA is different. You pay income tax upfront and Uncle Sam promises tax-free withdrawals when you're retired.

The Math. According to data from the non-partisan Congressional Budget Office, math will drive a surge in the $21 trillion U.S. debt starting in 2023, when interest owed on the debt accelerates, as does the risk of default. As 2023 nears, running trillion-dollar budget deficits annually becomes an increasingly untenable policy and tax rates are likely to rise.

Inflation, too. Inflation has been low for many years. While it is not expected to rise sharply, the real cost of the federal debt would be reduced if inflation rises. Inflation is unlikely to work against those converting to a Roth IRA in 2018.

Widow Penalty. Many surviving spouses will face a tax penalty after losing a mate under the new tax brackets enacted by the Tax Cuts And Jobs Act. For example, a couple with $170,000 of adjusted gross income is in the 24% top bracket, but after one spouse dies, the survivor would fall into the 32% bracket.

Avoiding The Widow Penalty. Retired married couples converting from a traditional IRA to a Roth account can avert the widow penalty with proper planning. Since Roth accounts generate tax-free income, converting to a Roth places a surviving spouse in a lower tax bracket. For example, a couple with $170,000 of adjusted gross income (AGI) would convert from a traditional IRA to a Roth IRA, lowering their AGI to less than $157,500. If one spouse dies, the survivor would be in the 24% bracket applied to singles with up to $157,500 of adjusted gross income.

Not For Everyone. Converting makes no sense unless you have cash on hand to pay the income tax on withdrawals from your traditional IRA. Paying taxes owed on a conversion by withdrawing larger amounts from a traditional IRA usually limits a nest egg's growth potential and is unwise.

Tax-sensitive investing is complicated, and this simplified version of the rules and examples are only intended to encourage to plan properly because a move like this can reduce a tax bill materially and annually for a widow.

We evaluate tax planning opportunities for clients. Please contact our office to talk about your personal situation or if you have any questions about this strategy.