What is the sequester? It is a package of forced budget cuts suggested by the President and approved by Congress in the Budget Control Act of 2011. The cuts were supposed to take place January 1, 2013 (part of the “Fiscal Cliff”) but were deferred to March 1st by the American Taxpayer Relief Act of 2012. The percent cut across the board is about 2.5% of discretionary spending. Nondiscretionary spending such as Social Security, Medicare and Medicaid are not affected. In fact, even with the sequester cuts, the fiscal year 2013 budget is still larger than the fiscal 2012 budget by about $15 billion. So the budget hasn’t actually been cut from last year, but the rate of growth has been cut.
What will be the impact on investment? To date there has been little impact. Some economists estimate the sequester will reduce GDP (Gross Domestic Product) by ~.5%, while others suggest lower public spending will allow the private sector to grow at a faster rate.
So why does the U.S. stock market continue to rise? The primary reason is the Federal Reserve’s monetary policies. Chairman Ben Bernanke, in recent Congressional testimony, stated the Fed’s policy will continue through 2016 and perhaps beyond. The stock market likes easy money. The true question is, when will it stop and what will be the fallout? Low interest rates will continue to be a challenge for savers and retirees on fixed incomes.
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