A more pa­tient Fed­eral Re­serve

The Saratogian (Saratoga, NY) - - BUSINESS - Chris + Den­nis Fa­gan

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.

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