The Feds New Policy
The fires that are rampant in California are heartbreaking and disruptive. At the very least, air quality is affected and in more extreme cases, people are losing houses, livelihoods, and security.
We have made a contribution to fire relief efforts. If you would like to help as well, here is one charity that is providing assistance:
In this crazy 2020, the last thing we needed was this. Let’s hope the weather cooperates and the fires are brought under control. Our thoughts are with those who are affected.
We’ve been saying for some time that we believe the risk that interest rates will rise significantly is completely dependent on GDP growth. Our expectations that GDP growth will be muted (based on the pandemic) continues to be our base thesis. In other words, we expect rates to remain low for a significant period of time.
Our portfolio strategies have been positioned on the assumption that rates will likely not rise in the near future. At the same time, we are making sure that we have some protections against any surprise inflation numbers by limiting the amount of longer-term debt instruments that we hold. The durations of our fixed income portfolios reflect this perspective and we believe has been the right strategy in these unprecedented times.
Today, the Federal Reserve announced a new policy on how they will look at interest rates and inflation which we believe will continue to depress interest rates going forward. This is a net positive for the economy, markets, and borrowers. It’s not so great news for those that have large cash holdings as we expect interest rates to remain low on short term securities for the foreseeable future. We believe DWM portfolio strategies are positioned appropriately based on this new pronouncement.
A recent CNBC article clearly outlined what the Feds new policy stance is. An excerpt is provided below.
Source: August 27, 2020, CNBC.com
As a practical matter, the move means the Fed will be less inclined to hike interest rates when the unemployment rate falls, so long as inflation does not creep up as well. Central bank officials traditionally have believed that low unemployment leads to dangerously higher levels of inflation, and they’ve moved preemptively to head it off.
However, a speech Powell delivered to a virtual gathering of the Fed’s annual Jackson Hole, Wyoming, symposium, and accompanying documents that codified the new policy, signaled a shift away from the old thinking. The policymaking Federal Open Market Committee approved the changes unanimously.
“Many find it counterintuitive that the Fed would want to push up inflation,” Powell said in prepared remarks. “However, inflation that is persistently too low can pose serious risks to the economy.”
In other words, rates are going to remain low which should be supportive to an economic recovery as soon as pandemic issues begin to hopefully calm down next year.