Should investors worry about the possibility that the Federal Reserve might raise interest rates this year? How about the negative economic consequences of the rally in the U.S. dollar? “Hawkish” Fed mistakes?
Well, the Fed can’t keep its grip on markets forever, and it doesn’t want to, either. Indeed, the era of “Yellenomics” rooted in excess labor supply justifying extraordinary accommodation is slowly coming to an end.
That said, when constructing investment portfolios we suggest investors stay calm and focus on the path of the Fed’s policy rate and its ultimate destination, as well as policy rates abroad, which are likely to stay low for the rest of the decade, compelling investors to keep reaching for higher yields and returns. In addition, look for opportunities to arise in equity and credit markets when markets inevitably become anxious in response to a Fed rate hike.
Yellen and the FOMC offer a soothing statement
Ever cognizant of its influence on financial markets, the Fed, in both its March 19 policy statement and its quarterly Summary of Economic Projections (SEP), demonstrated that it is sympathetic to much that has been worrying markets of late, and Janet Yellen in her post-FOMC press conference put an exclamation point on it.
Most soothing for investors was the lowering of the Fed’s projection for its policy rate, the federal funds rate. Specifically, the Fed lowered the cumulative amount of rate hikes it expects to implement this year and through 2017 by about half of a percentage point. Sensibly, the Fed also lowered its forecast for economic growth and inflation (see Figure 1). The Fed obviously has a few worries of its own.
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