Fed’s Reasoning in Question
September 21st, 2015 | Work to Wealth
The highly anticipated Federal Open Market Committee (FOMC) meeting concluded yesterday with the Federal Funds Rate left unchanged. Comments by Chair Yellen left some observers scratching their heads. While a rate increase was less expected than a few months ago, the reasoning behind the governor’s decision left many market participants concerned.
Two important points were made that were unanticipated and highly unusual. First, Chair Yellen commented on the world’s lackluster growth as being a contributing factor in the decision process on setting domestic policy. Consideration for economic growth across the world has not been mentioned in any prior Fed meetings. The Federal Reserve is the central bank for the United States, not the world. And while moves by the US Federal Reserve may have an adverse impact on other central banks and other country’s economies, their mandate is supposed to be focused solely on the domestic economy.
Second, Chair Yellen did not explicitly deny the use of Negative Interest Rate Policy (NIRP) in the future. She stated that at this time it is not a consideration, but in the future they would “evaluate” it in a “weak economy that needed additional stimulus…”. Market participants did not expect the Fed to comment on consideration of NIRP as a policy tool. There is now enough data to support the claim that Zero Interest Rate Policy (ZIRP) has minimal effect on Gross Domestic Product (GDP) growth and a significant impact on inflating asset prices like the stock and bond markets. While the Fed continues to signal that rates will rise in the future, there is some indication that accommodation will not only continue, but if needed, they may consider even more extreme measures similar to what was instituted last year by the European Central Bank (ECB) with disappointing results.
In response to the Fed’s comments, the markets were relatively tame yesterday. However, after an evening reviewing the governor’s comments, the markets changed course. If the Fed is so concerned about global growth, that they decided not only against raising interest rates, but also considering even more extreme measures, then maybe the market should be concerned too.
At DeCesare Retirement Specialists we prioritize safety of capital above growth opportunity during volatile times. Our risk management strategy, has resulted in our clients’ accounts experiencing very little (if any) volatility. This is partly due to our prudent asset diversification with non-correlated investments.
Should you have any questions about your own accounts outside of our management, please call me Steve DeCesare, CFP® at 856.235.3830 or email at Steve@DeCesareRetirement.com.