Brexit on Fed’s Mind
July 6th, 2016 | Work to Wealth
A quick recap, our May Fed Update commented on how the FOMC’s May meeting minutes indicated a potential increase in interest rates in the June/July time frame. This resulted in increased uncertainty due to the mixed signals being conveyed by the FOMC about their future policy decisions. The markets reacted with a brief but dramatic decline in the stock market, an increase in the US Dollar, and a decline in oil prices. Shortly thereafter, a reevaluation of the FOMC’s comments reversed the negative trend for a brief time.
Today, the FOMC June meeting minutes were released providing some insight into the thought process of raising rates in the June or July time frame. The meeting concluded just a few days prior to the United Kingdom referendum and as was expected, per Bloomberg:
The minutes of their June 14-15 meeting show that the Federal Open Market Committee saw it prudent to wait for the result of Britain’s June 23 referendum, which at the time was still too close to call.
The committee also weighed the health of the U.S. economy and the long-run trajectory for rate increases. A slowdown in hiring was among their chief concerns and another reason for caution. While “participants generally agreed that it was advisable to avoid overreacting to one or two labor-market reports,” the implications of recent employment data were viewed as “uncertain,” the minutes show. Most officials judged that they needed more information on jobs, production and spending.
“Most participants judged that, in the absence of significant economic or financial shocks, raising the target range for the federal funds rate would be appropriate if incoming information confirmed that economic growth had picked up,” job gains were sufficient to achieve full employment and inflation was moving up toward their 2 percent goal in the medium term, the minutes showed.
Then just two days following the historic UK referendum to leave the European Union as discussed in our monthly newsletter The Retirement Report, the FOMC and the major central banks of the world took center stage once again to offer support by the way of monetary policy. After the result of the “Brexit” referendum was announced, the stock markets of the world went into a tailspin as the unexpected results caused panic, uncertainty, and steep losses in asset values. The Pound Sterling was quickly devalued, the US Dollar increased in value along with US Treasuries and Gold as investors ran for safety.
While Brexit certainly turned out to be a financial shock, at least over the short tern, the concern continues to be that the FOMC and the other central banks of the world will never find the perfect time to begin raising rates back to a more normal level, resulting in a continued cycle of dependency, low growth and uncertainty. As illustrated below, the FOMC is stuck in a vicious cycle that unless broken may result in severe long term damage to the economy and financial system.
Not so merry-go-round: By some accounts the Fed is stuck in an adverse feedback loop. They want to raise interest rates so they can “reload” their policy ammunition, but the markets won’t let them. The chart of the day illustrates this nightmarish merry-go-round: the Fed threatens to hike, markets tank, the Fed delays the hike, the market recovers and the cycle repeats. The end result is repeated delays and very little actual policy tightening.
At DeCesare Retirement Specialists we prioritize safety of capital above growth opportunity during volatile times. We continue to employ counter risk measures alongside a prudent growth strategy in order to protect capital in what continues to present as a challenging economic and investment environment.
Should you have any questions and/or concerns about your accounts with us or outside of our management, please call me at 856.235.3830 or email me at Steve@DeCesareRetirement.com.