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Fed Won't Change Tactics, So You Must Adapt Your Investment Strategy

Fed Won't Change Tactics, So You Must Adapt Your Investment Strategy
(Dollar Photo Club)

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Monday, 21 September 2015 10:30 AM Current | Bio | Archive

Federal Reserve officials will probably continue to bicker, in public and behind closed doors, for the foreseeable future about interest-rate strategy.

Richmond Fed President Jeffrey Lacker, who was the only dissenter among last week’s FOMC 10 voting members, commented: “Such exceptionally low real interest rates are unlikely to be appropriate for an economy with persistently strong consumption growth and tightening labor markets.”

Lacker also noted keeping interest rates at their current level deviates from the way the Fed has responded to the economy in the past, which is dangerous because public understanding of the Fed's behavior has been “an essential foundation for the monetary stability we currently enjoy.”

St. Louis Fed President James Bullard, who is a FOMC voting member in 2016, said his case for normalization is simple: The Committee’s goals have essentially been met, but the committee’s policy settings remain stuck in emergency mode.

He also didn’t feel happy with some of the Fed's Chair comments: “… I think developments that we saw in financial markets in August, in part reflected concerns that uh, Chinese — there was downside risk to Chinese economic performance and perhaps concerns about the deafness with which policymakers were addressing those concerns … a lot of our focus has been on risks around China but not just China, emerging markets, more generally in how they may spill over to the United States.”

Bullard concluded financial markets tend to wax and wane, sometimes suddenly. “Monetary policy needs to be more stable.”

Besides all that, please remember:

  • The FOMC’s policy settings remain “at emergency levels;”
  • The Fed’s balance sheet has ballooned to about $4.5 trillion from the $800 billion where it was in 2006;
  • The policy rate remains at about 13 basis points, where it now has been for nearly 7 years while the Committee thinks the long-run level of the policy rate should be about 350 basis points.

You don’t have to be a banker to see the Fed has an “abnormal situation” on its hands that can't go on forever.

Let’s hope at the FOMC they decide promptly to start their long way back to “normalization.”

We continue to live in an “abnormal” world, where among other things, world trade continues to face serious headwinds.

The Fed can’t resolve slowing global growth because the relationship between world trade and world income has undergone structural changes that has resulted in the current global slow growth environment.

I'm sorry, it’s rather complicated. But we’ll have to learn to live with it and adapt our investments to this new situation.

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HansParisis
I'm sorry, it’s rather complicated. But we’ll have to learn to live with it and adapt our investments to this new situation.
fed, economy, investors, policy
423
2015-30-21
Monday, 21 September 2015 10:30 AM
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