Don’t Sweat the Fed

The chance of a market-moving surprise from the Fed is negligble

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If tapering is indeed wrapped up in October, as the current consensus projects, is three months really a “considerable time”?

The statement went on to say:

The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal.

This isn’t the tone of a Fed that plans to take an aggressive approach to raising interest rates. Notably, the Fed intends to raise rates gradually even after it begins the process of normalizing policy. This means that even if the Fed did begin raising rates in January 2015, the fed funds rate probably wouldn’t be much above 1% by the end of next year … which isn’t exactly a level that would kneecap the equity markets.

The Expectations Game

This brings us back to the potential market impact of Fed policy. The Fed is erring on the side of caution with respect to tightening, which means that monetary policy isn’t a meaningful threat to market performance. For the Fed to take the risk of raising rates faster than the current timetable, it would need to see a substantial uptick in growth. This scenario in fact would be positive for the markets, on balance, since it would provide a much-needed boost to corporations’ top-line revenues.

Already, however, some cracks in this storyline are beginning to show: The 10-year Treasury yield dropped below 2.68% on Wednesday from the 3.03% level at which it entered the year. This downturn has occurred even with the backdrop of Fed tapering — indicating that the growth outlook may be less stellar than the professional optimists in the money-management industry would have us believe. The real threat to stock prices isn’t Fed rate hikes, but rather the potential for slower-than-expected growth — especially if the slowdown is the result of turmoil in China or elsewhere in the emerging markets.

Add it up, and there’s no reason to fear Fed policy right now.

If anything, market participants should be hoping that the Fed maintains its current track or takes an approach that’s slightly more aggressive than expected, because that’s far preferable to the alternative. The topic of Fed policy may make for good headlines, but it will do little to help investors’ bottom lines.


Article printed from InvestorPlace Media, http://investorplace.com/2014/01/fed-policy-markets/.

©2014 InvestorPlace Media, LLC

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