Thoughts on Recent Fed Moves
“When the facts change, I change my mind. What do you do, sir?”
This quote is often attributed to the British economist John Maynard Keynes. As is often the case with quotes that are easily and universally referenced to make a point, what he originally said was most likely somewhat different, but it helps me make my point so bear with me. As the world around us changes, it is important to be flexible. The Federal Open Market Committee has heeded this approach with its about-face in policy in the last few months. Let’s dive in.
It’s always important to remember the dual mandate applied to the Fed’s policies: maximum employment and price stability. The decision to hike the Fed Funds Rate in December was done so in the face of relatively tame inflation. The equity markets clearly did not like this move and sold off as they adjusted to the new reality of slow growth combined with tighter monetary policy. As the stickier measures of inflation (prices outside of food and energy) have remained stable, the Fed is walking back its original path of interest rate policy. Additionally, the biggest change to come out of the recent meeting was their decision on what to do with the assets that are currently on the balance sheet. The mechanics of the plan for balance sheet normalization aren’t necessary to understand the takeaway: this looks to be a more accommodative central bank in the near term.
So what has changed? What does the Committee see around the corner? One could argue that they were too quick with the hike in December and are now just reversing course. Another way to approach this is to look at some of the data points that have emerged. The one that grabbed the most headlines was the jobs number in February – 20,000 jobs created vs 180,000 expected. Two caveats: 1) this data set is noisy and prone to revisions and 2) the government shutdown probably had a hand in the reporting of some of the data. Finally, who better to tell us about what the Fed is thinking than the Fed itself (exhibit 1)?
Exhibit 1
Exhibit 1 shows the difference in language for their outlook on the economy between their last two meetings. They see slower growth of household spending and business fixed investment, decline of overall inflation levels, and little change in longer-term inflation expectations. As we pointed out in our State of the Economy presentation in January, there were (and still are) economic indicators that caused us to take a slightly more defensive posture in our portfolios. It is something that we monitor on a daily basis.
The big question, as always, is what does this mean for investors? At the risk of sounding flippant, not that much. For true long-term investors, parsing words in the Fed statement to read the tea leaves is not something that should be a focus. The focus should instead lie with things we can control: how much we are saving, how much we are spending, and making sure we stick to a plan. Leave the speculation to others.
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