The Independent Market Observer

The Fed: Is No News Good News, or Just Bad News Taking Its Time?

Posted by Brad McMillan, CFA®, CFP®

Find me on:

This entry was posted on Sep 18, 2015 1:28:00 PM

and tagged In the News

Leave a comment

the fedI was pretty much right on my take that the Federal Reserve would choose not to raise rates yesterday. The U.S. economy is doing well, according to the statement, but rates will remain at zero due to worries about financial markets and the rest of the world. Waiting a bit longer has little downside compared with the risks of acting now—or so the Fed apparently believes.

2 things to take from the Fed’s decision
  1. The Fed appears to have extended its mandate from unemployment and inflation to the financial markets. This has been implicit for years, of course, so it’s not a surprise. But it is interesting to see it acknowledged.
  2. The Fed is now looking much more to the rest of the world in setting policy. U.S. growth is all right, again per yesterday’s statement, but perhaps rates should stay at zero until the world as a whole starts to grow. This is new.

The Fed has always been aware of and taken the rest of the world into account, but, for legal and political reasons, it has never explicitly invoked global financial health as a reason for policy. Indeed, per its statutory goals, the Fed should not be invoking this now. Because it has no real ability to affect foreign economies, I would argue that the Fed should stay focused on the U.S. economy and that this comment was a mistake.

International markets spooked

International markets seem to agree. The statement focused on worries about international economies and markets, and those comments seem to have spooked markets in Europe and much of Asia. Even markets in the U.S. are reacting negatively as I write this. By raising questions about issues it has no ability to affect, the Fed has injected itself into a wider debate where it really has no place.

By keeping rates low, in the hopes of stemming market turmoil, the Fed has let everyone know that, even with the ongoing U.S. recovery, it is still not confident enough to move policy away from emergency levels. By attributing this to international markets, it raises very serious questions as to just how weak those economies and markets are—which increases uncertainty, and hurts markets, across the board.

The actual communication from the Fed was a mixed bag. Most members now expect a rate hike in 2015, which would mean in October or December, and, as expected, the dot plot reflects this. At the same time, expected inflation has been revised down for the next several years, as have additional rate increases over that time period.

The worst of both worlds

If the Fed wanted to reduce uncertainty and market risk with this decision, it failed. While markets were not expecting a rate hike, they were expecting some more clarity. By not providing that clarity here in the U.S., and provoking worry about international markets, the Fed has actually gotten the worst of both worlds.

What does this mean for markets? In the short term, it is negative, with lower confidence and more downside risk. In the medium term, it also raises the risks associated with later rate decision meetings. With no clear guidance on when or if rates will actually go up, we continue in a state of uncertainty, exacerbated by the knowledge that the Fed is sufficiently worried about the financial and international markets to keep rates at emergency levels, despite a strengthening U.S. economy.

Not, I think, what the Fed intended to accomplish.

                      Subscribe to the Independent Market Observer            

Subscribe via Email

Crash-Test Investing

Hot Topics



New Call-to-action

Conversations

Archives

see all

Subscribe


Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

The VIX (CBOE Volatility Index) measures the market’s expectation of 30-day volatility across a wide range of S&P 500 options.

The forward price-to-earnings (P/E) ratio divides the current share price of the index by its estimated future earnings.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®