Tags: SmartMoney | Fed | Risk | chatty

SmartMoney: Chattier Fed May Boost Risk, Volatility

Wednesday, 04 Jan 2012 12:01 PM

By Michael Kling

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More transparency from the Federal Reserve might actually increase risk and volatility for investors instead of reassuring financial markets.

The Fed's decision to release interest-rate forecasts four times a year is supposed to provide clarity. But investors who pay too much heed to the Fed may find themselves in trouble, some experts warn, SmartMoney.com reports.

For example, the Fed may predict that rates will remain low, lulling investors into holding Treasurys. If Treasurys become less popular for some reason — say if investors seek higher yields elsewhere — Treasury prices will plummet and those still holding those bonds will suffer.

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"The Fed doesn't control Treasury prices," bluntly explains Jeff Sica of Sica Wealth Management, according to SmartMoney.com.

Ben Bernanke
(Getty Images photo)
The Fed's forecasts could change suddenly due to an increase in inflation or other reasons, experts told SmartMoney.com. Indeed, factors outside its control may have greater impact than any decisions by the central bank and Chairman Ben Bernanke.

And another report for the markets to respond to may just increase volatility. "It could be more fodder for speculation," Denise Shull, founder of The ReThink Group, an investment consultant, told SmartMoney.com.

Rather than relying on a chattier Fed, investors should take a balanced approach to decision-making, experts advise. They may want to hold mostly short-term bonds in case rates rise.

Some observers believe the Fed will launch another stimulus program once its new transparency is in place, according to CBS News.

For instance, Dan Greenhaus, of BTIG, says the Fed might start another round of bond buying later this year to drive down long-term rates.

But other experts disagree.

Paul Dales, of Capital Economics, believes the Fed won't do more bond purchases unless the economy worsens.

Many economists think the announcements will push long-term rates even lower and boost the economy, CBS News notes. Consumers and investors may spend and borrow more if they expect rates to stay low for a certain period.

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