The Fed Changes its Tune

Susan Jung |

Why have markets lately been trending higher? There are two developments which investors perceive as an overall positive for the US economy. 

First, dialogue is occurring between China and the United States in attempt to settle long-held disputes about trade policy. Perhaps more importantly, the Federal Reserve has decided to change course regarding its aggressive strategy to increase interest rates in 2019. On a consistent basis, Fed officials are now stating that they could very well change their mind regarding the path of interest rate policy. They are suggesting a slower course of action.

With the Federal Reserve now stating that they will avoid actions that they believe will harm the US economy, sentiment has improved. Benign inflation, lower interest rates, and a strong employment picture cast some doubt on the likelihood of the US economy falling into recession.

A recent article on CNBC’s website highlighted the change in Federal Reserve strategy.

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Markets expect the Fed to hold off on rate hikes and are even anticipating the possibility of a cut during the next year or two, playing into the low-rate environment the president has espoused.

That in turn would decrease the chances that Trump might try to fire Fed Chairman Jerome Powell, a move universally regarded as difficult to achieve and likely disruptive if not disastrous for the market.

"Replacing Powell might prompt initial disruptions in markets. Reduced US central bank independence could lead to longer-term damage to the US economy," Dana Peterson, North American economist for Citigroup, said in a note that called the threat of Powell getting ousted "deep within the realm of tail risks."

That chance may have declined even more in recent days as market conditions improved and Powell in a public forum Friday provided assurance that the Fed will be "patient" in how it normalizes monetary policy, attentive to what the market is signaling, and flexible in how it proceeds with interest rates and its balance sheet reduction.

Source: Jan 9, 2019 CNBC article by Jeff Cox
https://www.cnbc.com/2019/01/08/trump-is-probably-going-to-get-his-way-with-the-fed-this-year.html
 

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Our economic outlook based on Federal Reserve interest rate projections is shaped by headlines. As a result, investment policy also is impacted as we invest portfolios. We will decipher each clue from the Federal Reserve and make adjustments to portfolios accordingly.

If you have any questions, do not hesitate to let us know. We are always here to help.

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