Hike or no hike, Federal Reserve is in a no- win position
Raise interest rates or don’t raise them — the Federal Reserve appears to be in a no- win situation.
“The Fed is in a bit of a pickle,” said UMB Bank chief investment officer KC Matthews, and that has put investors in a jam.
Fed Chair Janet Yellen faces the difficult task of talking equity markets, mired in a miserable January, off the ledge, Matthews said.
Keeping rates steady, along with more dovish language fromthe Fed, on Wednesday appeared to be moves to reassure the markets.
But the Standard & Poor’s 500, positive much of the day Wednesday, reversed course after the Fed statement and ended down1.09 percent, a pattern other indexes followed.
After adding 6 million jobs the past two years, the U.S. economy didn’t warrant a zero interest rate policy, and the Fed made the right move last month, said Carl Tannenbaum, chief economist at Northern Trust on a visit to Denver lastweek.
“The areas where the economy is growing the fastest are the hardest to count,” he said. “They have left themselves room.”
Matthews argues that the Fed, by not weighing what was happening in the rest of theworld, may havemoved too soon.
“The Fed mandate has to evolve beyond inflation and full employment,” Matthews said. “Today, they have to look globally.”
The U. S. dollar was strengthened by tightening monetary policy when central banks elsewhere were loosening. That hasweighed heavily on agriculture, manufacturing and other export sectors and piled on the woes facing oil and gas.
Matthews sees a scenario of “rolling” recessions across sectors such as natural resources, agricultural and transportation thatwill contribute to a lackluster year.
Ayear ago, Matthewswas in the camp of those forecasting an economic “liftoff” that would justify a hike in the federal funds rate late in the year.
Despite growing concerns about the country’s economic momentum, the Fed hit the launch button rather than aborting.
“The Fed still is worried about inflation and not ready to support growth even though they themselves see that the economy has slowed. The result is an equitymarket that has little to be optimistic over,” commented Steven Ricchiuto, chief economist at Mizuho Securities USA, on Wednesday.
So where should investors look given the market’s wild gyrations?
For those with money to invest, energy, industrials and railroads are areas to watch closely, although it’s too early to move on those, Matthews said. High- yield bonds, hit hard recently, are another area.
“We are using high- yield bonds as an equity surrogate,” he said. “You can get an 8 or 9 percent yield for half the volatility of stocks.”
Whenever the U. S. dollar weakens, he suggests investors consider investing more heavily into European stocks while staying away from emerging markets.
“We arewatching theU. S. dollar for many reasons,” Matthews said.