On December 19 Federal Reserve chairman Jerome Powell announced that the Fed would increase its target federal-funds rate to a range between 2.25 – 2.50 percent and suggested that two more increases may be in store for 2019.
The stock market, which had maintained some expectation that the Fed might be done raising rates, dropped sharply. The S&P 500 index closed the day down 1.6 percent, bringing its fourth quarter loss to date to just over 16 percent.
The Fed’s short term interest rate policy is discretionary, and as such is unbound by any rule or standard. As a result the fate of global capital markets, with trillions of dollars of investors’ assets at stake, can change dramatically at any time in reaction to the utterances of the Fed chairman.
Ultimately, on the Fed’s announcement date, investors wait with bated breath to learn of the judgement rendered by the ten voting members who comprise the Fed’s Open Market Committee.
This process generates needless costs – not just the anxiety it creates for investors but for the economy at large; consumers and producers alike spend valuable resources trying to inform their guess as to what the Fed is going to do – resources that could be put to better uses.
Our parent, AIER, has pointed out that an alternative rules-based mechanism would go a long way in reducing these costs:
“A rule—to the extent that it is credible—anchors expectations. It lets us know what to expect. And, if we know what the monetary authority will do in the future, it will be much easier for us to decide which production processes to take on. In other words, the benefits are in the binding …credibly committing to sound monetary policy makes us more productive than we would be in the absence of such a commitment. By anchoring expectations, it can make it cheaper to engage in long term projects—freeing up some resources to produce more stuff.”
Several rules have been proposed that would bind monetary growth to measurable, publicly available information such as nominal GDP or the rate of price inflation. While each variant has pros and cons, all would largely eliminate guessing and allow us to employ our resources more productively. Until a rules-based approach is adopted, investors should avoid guessing at the Fed’s next pronouncement. The best countermeasure to Fed-induced volatility is strict adherence to your own rules-based portfolio based on specific allocations tailored to your needs.
Also In This Issue:
Market Trends and Business Cycles
Interest Rates and Stock Prices
The High Yield Dow Investment Strategy
Recent Market Statistics
Dow Jones Industrials Ranked By Yield
Asset Class Investment Vehicles
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