Tim Holland, CFA, Senior Vice President, Global Investment Strategist
What a difference a month – give or take – can make. In December, the Federal Reserve (Fed) raised the Fed Funds rate 25 basis points (think of a basis point as cents are to a dollar) to a range of 2.25% to 2.50% and the market promptly sold off a lot, see the Financial Times image below.
While that rate increase was expected, it was the post-December Fed meeting press conference by Chairman Jay Powell that spooked investors as Powell indicated that the Fed was on a pre-determined path concerning interest rate increases and the ongoing shrinking of its balance sheet, regardless of market volatility and economic uncertainty. As an aside, the Fed’s balance sheet grew significantly during the Great Recession due to an undertaking known as Quantitative Easing/”QE,” where the Fed purchased trillions of dollars of bonds in the hope of stimulating the economy. Now that the economy is on much firmer footing, the Fed has been shrinking its balance sheet, an undertaking known as Quantitative Tightening/”QT.” Most economists believe QT will prove restrictive to economic growth.
Well, the Fed met again last week and is now singing a different tune. Specifically, the Fed is promising a much more patient, data dependent approach to both future interest rate increases and balance sheet management. The stock market clearly welcomed this gradualist approach, moving sharply higher on January 30, per the CNBC headline.
We have seen monetary policy risk – the danger of the Fed raising rates too far, too fast and sparks a recession – as one of two meaningful risks to the economy and markets this year. We now seem to be solving for monetary policy risk, and we do believe the Fed’s more patient, deliberate approach is appropriate. If we can solve for the other meaningful risk to the economy and markets, mainly US/China trade, we should see a boost to both consumer and corporate sentiment and spending. We do expect good news on the trade front soon, and we remain cautiously optimistic on the US economy and US equities into 2019.
The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a registered investment advisor.