Tags: interest rates | policy | Federal Reserve | investing

Federal Reserve Rates Policy Leaves Many Unanswered Questions

Federal Reserve Rates Policy Leaves Many Unanswered Questions
(Dollar Photo Club)

Monday, 14 December 2015 08:38 AM Current | Bio | Archive

Following Fed Chair Mrs. Yellen’s statement in September: “I expect that inflation will return to 2 percent over the next few years as the temporary factors that are currently weighing on inflation wane, provided that economic growth continues to be strong enough to complete the return to maximum employment and long-run inflation expectations remain well anchored.

Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter. But if the economy surprises us, our judgments about appropriate monetary policy will change,” it will be interesting and hopefully enlightening to hear what Mrs. Yellen will add or change to her statement this week as inflation remains literally in the doldrums in the U.S., but also in most other places in the world.

After this week’s decision on the Fed funds rate, open questions will remain on how and to what extend it will affect the U.S. and globally the financial markets as well as the various economies.

Please keep in mind the normalization process of the Fed could easily take something like 3 years or even more.

Maybe the new FOMC dot chart could help us somewhat for getting a better/clearer idea on what the Fed thinks we could go further down the road.

Anyway, markets from their side consider at present, which of course is different from what the FOMC’s view will be, the Fed’s path towards normalization as “unstoppable” through February 2017.

Maybe for investors it could be not such a bad idea being prepared for volatility once the FOMC statement will be out and then thereafter because of what Mrs. Yellen will say, or not say, at the press conference.

The big unknown is if we’ll see a spike in volatility above the all-important “20” benchmark and if it will be only temporary or if it will become a more permanent phenomenon.

This is important because the volatility spike we have witnessed last Friday, with its associated market corrections in different markets, has given us something like a foretaste of what could be in store for some time to come if volatility perseveres above 20.
Investors should never forget if the VIX remains most of the time above “20” as has been the case between mid-2007 and the start of 20112 markets evolve into a “correction mode” environment.

On the contrary, as has been the case since the first half of 2012 and during which time the VIX has remained mostly below 20, we have experienced a bullish environment.
Besides all that and maybe only anecdotal but nevertheless interesting, the Boston-based asset management firm BMO (Jeremy Grantham and Mayo van Otterloo), which has obtained a strong reputation for its predictions of various bubbles, recently released its “Global 7‐Year Asset Class Real Return Forecasts.”

Again, these are only forecasts and do not mean in anyway things will happen the way BMO thinks they could happen.

Anyway, BMO expects over the next 7 years U.S. large stocks to produce an average negative return of -2.0 percent, U.S. small stocks a negative of -0.5 percent, U.S. high quality stocks a negative of -0.2 percent, International large stocks a return on average of a positive 0.2 percent, International small stocks a negative of -0.8 percent and Emerging Markets a positive of 4.0 Percent.

The people at BMO also expect U.S. bonds to produce a negative return of -0.9 percent over the same time span, “hedged” International bonds a negative of -2.7 percent, Emerging debt a positive of 2.0 percent, U.S. inflation linked bonds a positive of 0,3 percent.

In simple words and if what BMO thinks that could happen is right, which is of course not a sure thing, stocks and bonds won’t be a “stellar” place to be invested in during the next 7 years.

I still think, long-term investors could do well keeping some of their buying powder dry in cash equivalent instruments that have a security equivalent to U.S. Treasurys.

I personally have no doubt there will come very interesting buying opportunities over the next 7 years when you’ll have the needed cash right at hand, which is of course easier said than done as it not only depends on you.

Finally, for investors who are interested in oil, on Friday when Spot Brent crude reached $38.65 per barrel, technically speaking, and taking the present price structure into account, the charts tell us $20 Brent is a possibility that could occur in H2 of 2016, which of course doesn’t mean it absolutely "will" happen.

Anyway, an interesting subject to follow. 

Etienne "Hans" Parisis is a Belgian-born bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.

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After this week’s decision on the Fed funds rate, open questions will remain on how and to what extend it will affect the U.S. and globally the financial markets as well as the various economies.
interest rates, policy, Federal Reserve, investing
Monday, 14 December 2015 08:38 AM
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