On Friday, the U. S. stock market had its worst day in two months, with the Dow, S & P 500 and NASDAQ Indices dropping, by 2.13%, 2.45% and 2.54%, respectively. The markets seem to have attributed that steep decline to the Fed; however, there is little room to complain; because, prior to perhaps 15 years ago, our Federal Reserve was totally cloaked in mystery. And now, members may speak openly!
It’s important to keep in mind that the Federal Open Market Committee, which sets monetary policy, is composed of twelve members. And like any group of professionals, these economists all have different interpretations of the same basic facts, and what their recommended course of action would be. On Friday, two were interviewed on CNBC-TV, and each had different concepts of the economy. So, what’s new?
Last December, the FOMC raised the short-term bank-lending rate from a range of 0.00%-0.25%, to 0.25% to 0,50%. Prior to that time, the so-called “Fed Funds” rate had not changed since 2009. There is also danger in any central bank, not just the Fed, from maintaining extremely low rates, and for such a length of time.
About an hour before the stock market opened on Friday, Eric Rosengren, President of the Federal Reserve Bank of Boston, and a member of the FOMC, was interviewed. It was pointed-out that, in years past, Mr. Rosengren had been “dovish” in the sense that he was normally in favor of lower rates. More recently, however, he has been a rate “hawk”, by recommending higher rates. On Friday, he said; “…risks to the forecast are becoming increasingly two-sided.” By that, Rosengren meant that while a slowdown overseas remains a concern, the U. S. economy has proven resilient, and could even overheat if Fed ;policy remains unchanged.
Then, just before mid-day, Fed Governor Daniel Tarullo, suggested in his interview that there may be a rate hike sometime this year; however, he said that he would prefer to see an inflation rate closer to the Fed’s 2.0% target rate, as well as a bit higher employment. Tarullo also suggested that it is difficult to determine what “full employment” is in today’s economy. He likewise pointed-out the need to consider the slower economic growth overseas.
A key concern that the Fed has is that, if the U. S. raises rates at a time when most other countries are lowering them, or maintaining a near-zero bank lending rate, the resultant strong dollar would hurt our export economy by making our products more expensive. Additionally, the higher rates would siphon some foreign investment away from weaker economies that need such funding.
All is not gloom and doom. When the Fed holds its next monetary policy meeting, on September 20-21, if it raises rates, they would still be quite low on a historical basis. Also, such a rate hike generally implies that it is necessary to keep an improving economy in check. And, aside from early market volatility, those three major stock indices—the Dow, S & P 500 and NASDAQ—are all up Year-to-Date, at 3.79%, 4.10% and 2.37%, respectively. But, always review your own investment portfolio in multi-year periods in order to even-out unusual volatility–both positive and negative!