A more patient Federal Reserve
After a volatile fourth quarter, the financial markets appear to be stabilizing a bit in what we believe is a result of a coordinated more dovish tone from the Federal Reserve and several of its’ District Presidents.
In our opinion, the minutes of the meeting of the Federal Open Market Committee (FOMC) depict the current outlook of the Fed as somewhat cautious regarding economic growth over the foreseeable future and therefore somewhat reluctant to pursue the further tightening of monetary policy by raising interest rates.
To add some context, incrementally the Fed lowered interest rates from 5.25% in June 2006 all the way to 0% in December 2008 as the impact of the Great Recession took its toll on the American economy. For seven years, this is effectively where interest rates remained. However, since December 2015 the Fed has raised interest rates by 0.25% nine times, the latest being at its December meeting and in doing so pushed the funds rate (the interest rate at which banks lend reserve balances to other banks) up to 2.50%. The most recent hike, of which there were four in 2018 coupled with trade rhetoric from the Trump Administration along with hawkish statements made by Fed officials is what most believe were the prime culprits in sending the market down 20% during the fourth quarter. We are also in this camp.
Referring back to the December meeting and contained within the above referenced minutes released this past Wednesday, the Fed notes that “with an increase in the target range at this meeting, the federal funds rate would be at or close to the lower end of the range of estimates of the longer-run neutral interest rate, and participants expressed that recent developments, including the volatility in financial markets and the increased concerns about global growth, made the appropriate extent and timing of future policy firming less clear than earlier.”
The Fed accomplishes several goals with this statement. They continue to walk back their previous hawkish tone, they note that interest rates are at or close to the target range, they have taken notice of the downturn in the financial markets and they express a concern about global economic growth. We are on record in print as well as have expressed our belief on our radio show that the Fed will remain accommodative for longer than is currently anticipated by the financial markets or what has historically been the norm. The Fed can always hike rates. However, what Japan has found out for more than two decades is that deflation is the real enemy because there are few if any monetary policy tools with which to combat it.
In what we believe is a response to the recent drop in equity prices as well as criticism of the Fed, the minutes made investors aware they themselves were aware of this concern in the minutes noting that “concerns over escalating trade tensions, global growth prospects, and the sustainability of corporate earnings growth were among the factors that appeared to contribute to a significant drop in U.S. equity prices.”
Finally, on two separate occasions St. Louis Fed President James Bullard in a Wall Street Journal Interview and Eric Rosengren, the President of the Boston Fed made dovish comments. Bullard noted that “we’ve got a good level of the policy rate today” while Rosengren stated that “current monetary policy seems appropriate for now, and can patiently observe future economic developments.”
Although we expect the volatility in the financial markets to continue, we do believe that while 2018 marked the year that many issues that ultimately negatively impacted the markets were created, 2019 will go down as one in which many will have been resolved.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call 518-279-1044.