Financial News

8
Apr

The Fed Hits the Brakes: No Rate Hikes Projected in 2019

The shift from further rate increases this year suggests that the Fed believes there is little to fear regarding high inflation.

At its meeting on March 20, 2019, the Federal Open Market Committee (FOMC) maintained the benchmark federal funds rate at the target range of 2.25% to 2.50% that was set in December 2018. This in itself was not surprising. But other communications signaled a definite hiatus in the Fed’s policy of raising interest rates and tightening the money supply.1

The FOMC has raised the funds rate nine times since December 2015, with four increases in 2018 alone. As recently as September 2018, the committee projected three more increases in 2019. That dropped to two projected increases at the December meeting. But the March projections suggest that there may be no rate increases in 2019 at all.2

The FOMC also indicated that it would slow its program of reducing excess reserves of Treasuries and other government securities that were built up during and after the recession in a policy known as quantitative easing. The reduction program will stop after September 2019 unless conditions change, reflecting the Fed’s belief that there is no need for further tightening of the money supply.3

The strongest communication to come out of the March meeting may be the unusually direct comments from Fed Chairman Jerome Powell. “We don’t see data coming in that suggest we should move in either direction,” he said. “They suggest that we should remain patient and let the situation clarify itself over time….It may be some time before the outlook for jobs and inflation calls clearly for a change in policy.”4

Dual mandate

Powell’s reference to jobs and inflation reflects the Federal Reserve’s dual mandate to foster maximum employment and price stability. The FOMC sets monetary policy in accordance with the mandate, using two primary tools: the federal funds rate and the monetary supply.

The federal funds rate is the interest rate at which banks lend funds to each other overnight to maintain legally required reserves. The funds rate serves as a benchmark for many short-term rates set by banks, including the prime rate, which in turn influences consumer rates such as auto loans and credit-card rates. It can also influence longer-term rates.

Theoretically, lowering interest rates and increasing the money supply will stimulate the economy, which is why the Fed took these measures during the recession and extended them through the long, slow recovery. (The federal funds rate was near zero for eight years, from December 2007 to December 2015.)

On the other hand, raising rates and tightening the money supply are intended to slow the economy, primarily to control inflation. In theory, a strong economy with low unemployment should put workers in a position to demand higher wages, and higher wages allow businesses to raise prices on their products, which allows them to expand and pay higher wages.

A moderate level of wage and price inflation is considered integral to a healthy economy, and the Fed has set a goal of 2% annual inflation as optimal for economic growth. However, despite a strong labor market, wages and the broader economy have not grown as quickly as expected, and inflation has generally remained below the 2% target. Thus, raising rates has been more of a preventive measure and return to historical norms than a response to an overheated economy or runaway inflation.

The shift from further rate increases suggests that the Fed believes there is little to fear regarding high inflation. In fact, Powell said that the greater danger is low global inflation, calling it “one of the major challenges of our time.”5While the Fed has raised rates steadily over the last three years — providing flexibility to drop rates if necessary — central banks in other countries have been slow to act due to sluggish economies and low inflation. Some have kept their benchmark rates below 0%, creating a risk of asset “bubbles” and placing them in a difficult position in the event of an economic downturn.6

Market reactions

The stock market rose moderately after the FOMC announcement, which came just two hours before the close of the New York Stock Exchange, but stocks still closed with a small loss for the day. The market generally applauds lower interest rates, but investors continue to be jittery about the potential for global economic weakness. In the longer term, stable interest rates at current levels may be good for stocks, which began to rally on January 4, 2019 — when Powell first preached “patience” — and gained more than 15% through March 20.7

The reaction in the bond market was stronger. The prospect of lower rates for an extended period — along with the Fed’s decision to keep more Treasuries in its portfolio — made current yields more appealing. Investors rushed to buy Treasury securities and other bonds, driving prices up and yields down. The yield on the 10-year Treasury note fell to 2.52%, the lowest level in 15 months and just seven basis points (0.07%) above the yield on the three-month T-bill — nearing a “yield curve inversion” considered by some economists to predict a recession. Two days later, on March 22, the curve inverted for the first time since 2007, with demand for longer-term bonds driven by soft global growth.8

Although pessimists have feared a new recession for years, Powell emphasized that the U.S. economy is “in a good place,” and the official FOMC policy statement pointed to “sustained expansion of economic activity” in its expectations for future economic direction.9-10 A potential pause in rate hikes this year does reflect some concern about economic growth, but it also suggests that the Fed believes the current level is a neutral rate where further movement up or down could have a negative effect. This is not necessarily cause for concern. It may just mean that the Fed is doing its job.

The return and principal value of stocks and bonds fluctuate with market conditions. Shares, when sold, and bonds redeemed prior to maturity may be worth more or less than their original cost. U.S. Treasuries are guaranteed by the U.S. government as to the timely payment of principal and interest.

1-3, 10) Federal Reserve, 2018-2019
4-5, 9) Bloomberg, March 20, 2019
6) The Wall Street Journal, March 21, 2019
7) The New York Times, January 4, 2019; March 20, 2019
8) MarketWatch, March 20 and 22, 2019

29
Mar

Federal Income Tax Returns Due for Most Individuals

Filing deadline for most individuals:

The federal income tax filing deadline for most individuals is Monday, April 15, 2019. Residents of Maine and Massachusetts have until Wednesday, April 17, to file their 2018 tax return because April 15 is Patriots’ Day and April 16 is Emancipation Day.

  • Monday, April 15, 2019
  • Wednesday, April 17, 2019, if you live in Massachusetts or Maine
  • Tuesday, October 15, 2019, if you file for an automatic six-month extension by the original due date

Need more time?

If you’re not able to file your federal income tax return by the due date, you can file for an extension using IRS Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. Filing this extension gives you an additional six months (until October 15, 2019) to file your federal income tax return. You can also file for an automatic six-month extension electronically (details on how to do so can be found in the Form 4868 instructions).

Special rules apply if you’re living outside the country, or serving in the military outside the country, on the regular due date of your federal income tax return.

Pay what you owe

One of the biggest mistakes you can make is not filing your return because you owe money. If the bottom line on your return shows that you owe tax, file and pay the amount due in full by the due date if at all possible. If you absolutely cannot pay what you owe, file the return and pay as much as you can afford. You’ll owe interest and possibly penalties on the unpaid tax, but you will limit the penalties assessed by filing your return on time, and you may be able to work with the IRS to pay the unpaid balance (options available may include the ability to enter into an installment agreement).

It’s important to understand that filing for an automatic extension to file your return does not provide any additional time to pay your tax. When you file for an extension, you have to estimate the amount of tax you will owe; you should pay this amount by the April 15 (April 17 if you live in Massachusetts or Maine) due date. If you don’t, you will owe interest, and you may owe penalties as well. If the IRS believes that your estimate of taxes was not reasonable, it may void your extension.

Having the right amount of tax withheld?

Taxpayers are required to pay most of their tax obligation during the year by having tax withheld from paychecks or pension payments, or by making estimated tax payments. A penalty may be due at tax time if too little is paid during the year, unless an exception applies. It seems that many taxpayers may not have properly adjusted their withholding or estimated tax payments for 2018 to reflect the many changes in the Tax Cuts and Jobs Act. The IRS has announced that it will waive the estimated tax penalty for tax year 2018 for taxpayers who paid at least 80% of their total tax liability during the year through federal income tax withholding, quarterly estimated tax payments, or a combination of the two.

The IRS continues to urge taxpayers to check withholding again this year to make sure they are having the right amount of tax withheld for 2019. You can give your employer a new Form W-4 to change your withholding.

25
Feb

There’s Still Time to Contribute to an IRA for 2018

Making a last-minute contribution to an IRA may help you reduce your 2018 tax bill. If you qualify, your traditional IRA contribution may be tax deductible. And if you had low to moderate income and meet eligibility requirements, you may also be able to claim the Savers Credit for 2018 based on your contributions to a traditional or Roth IRA. Claiming this nonrefundable tax credit may help you reduce your tax bill and give you an incentive to save for retirement. For more information, visit irs.gov.

You have until your tax return due date (not including extensions) to contribute up to $5,500 for 2018 ($6,500 if you were age 50 or older on December 31, 2018). For most taxpayers, the contribution deadline for 2018 is April 15, 2019 (April 17 for taxpayers who live in Maine or Massachusetts).

Even though tax filing season is well under way, there’s still time to make a regular IRA contribution for 2018. You have until your tax return due date (not including extensions) to contribute up to $5,500 for 2018 ($6,500 if you were age 50 or older on December 31, 2018). For most taxpayers, the contribution deadline for 2018 is April 15, 2019 (April 17 for taxpayers who live in Maine or Massachusetts).

You can contribute to a traditional IRA, a Roth IRA, or both, as long as your total contributions don’t exceed the annual limit (or, if less, 100% of your earned income). You may also be able to contribute to an IRA for your spouse for 2018, even if your spouse didn’t have any 2018 income.

Traditional IRA

You can contribute to a traditional IRA for 2018 if you had taxable compensation and you were not age 70½ by December 31, 2018. However, if you or your spouse was covered by an employer-sponsored retirement plan in 2018, then your ability to deduct your contributions may be limited or eliminated, depending on your filing status and modified adjusted gross income (MAGI). (See table below.) Even if you can’t make a deductible contribution to a traditional IRA, you can always make a nondeductible (after-tax) contribution, regardless of your income level. However, if you’re eligible to contribute to a Roth IRA, in most cases you’ll be better off making nondeductible contributions to a Roth, rather than making them to a traditional IRA.

2018 income phaseout ranges for determining deductibility of traditional IRA contributions:
1. Covered by an employer-sponsored plan and filing as:Your IRA deduction is reduced if your MAGI is:Your IRA deduction is eliminated if your MAGI is:
Single/Head of household$63,000 to $73,000$73,000 or more
Married filing jointly$101,000 to $121,000$121,000 or more
Married filing separately$0 to $10,000$10,000 or more
2. Not covered by an employer-sponsored retirement plan, but filing joint return with a spouse who is covered by a plan$189,000 to $199,000$199,000 or more

Roth IRA

You can contribute to a Roth IRA even after reaching 70½ if your MAGI is within certain limits. For 2018, if you file your federal tax return as single or head of household, you can make a full Roth contribution if your income is $120,000 or less. Your maximum contribution is phased out if your income is between $120,000 and $135,000, and you can’t contribute at all if your income is $135,000 or more. Similarly, if you’re married and file a joint federal tax return, you can make a full Roth contribution if your income is $189,000 or less. Your contribution is phased out if your income is between $189,000 and $199,000, and you can’t contribute at all if your income is $199,000 or more. And if you’re married filing separately, your contribution phases out with any income over $0, and you can’t contribute at all if your income is $10,000 or more.

2018 income phaseout ranges for determining eligibility to contribute to a Roth IRA:
Your ability to contribute to a Roth IRA is reduced if your MAGI is:Your ability to contribute to a Roth IRA is eliminated if your MAGI is:
Single/Head of household$120,000 to $135,000$135,000 or more
Married filing jointly$189,000 to $199,000$199,000 or more
Married filing separately$0 to $10,000$10,000 or more

Even if you can’t make an annual contribution to a Roth IRA because of the income limits, there’s an easy workaround. If you haven’t yet reached age 70½, you can make a nondeductible contribution to a traditional IRA and then immediately convert that traditional IRA to a Roth IRA. Keep in mind, however, that you’ll need to aggregate all traditional IRAs and SEP/SIMPLE IRAs you own — other than IRAs you’ve inherited — when you calculate the taxable portion of your conversion. (This is sometimes called a “back-door” Roth IRA.)

Finally, if you make a contribution — no matter how small — to a Roth IRA for 2018 by your tax return due date and it is your first Roth IRA contribution, your five-year holding period for identifying qualified distributions from all your Roth IRAs (other than inherited accounts) will start on January 1, 2018.