When many of us hear the words “The Fed” we think of The Federal Government however in the financial world “The Fed” stands for The Federal Reserve. The Federal Reserve serves as the central bank of the United States and creates monetary policy. The Fed’s decisions on interest rates and open market activities have an enormous effect on the economy. Among the tools available to the Fed in managing monetary policy is open communication. The theory runs that they can influence markets by signaling their intentions or expectations regarding rate policy in the future. Although this communication can and certainly does influence markets it can all too often be a crude instrument. There are seven Fed Governors, many of which are on the lecture circuit, each happy to share their own unique and often conflicting opinions; they frequently accomplish little more than to sow confusion. This confusion can often create distortions in markets; additionally, this confusion can create unintended or contradictory market movements. For example, if the Fed announces that the economy has grown at a rate faster than expected it would not be surprising to see the market move down in the short term based on this news. The downward pressure created by this seemingly positive news may be due to speculators now concerned about The Fed moving up its plans to increase interest rates based upon an improving economy. Although these short term movements should be of little consequence to long term diversified investors, it is important to expect and understand these fluctuations.
During recent weeks there has been an unusual degree of harmony among committee members as they seem to be preparing investors for a much higher probability of a rate hike at the June meeting than was reflected in market pricing. We hope that we are interpreting their comments correctly and that they do indeed follow through with a tightening of monetary policy this summer. In our humble opinion, the twin objectives of full employment and price stability have been well and truly met. Unemployment has fallen to a level many consider at or near the natural rate, new unemployment claims are at historic lows, and unfilled job openings are at historic highs. Simultaneously, core inflation is now above the Fed’s stated target of 2%, wages are rising at an increasing clip, and commodity prices are rebounding, pointing to headline inflation readings above 2% sometime in the back half of the year.
For quite some time weak economic growth has been an argument for postponing action that no longer appears to be a valid argument. A banner retail sales report and surging new home sales make it clear that the domestic consumer is alive and well. GDP (gross domestic product) which is perhaps the most important indicator for the U.S. economy was admittedly soft in the first quarter; however, it was better than expected and a much stronger GDP reading is expected for Q2. Conditions overseas are also, for the most part, stable. Japan continues to struggle, but activity in China appears to be getting better and Europe is coming off of a surprisingly strong first quarter.
In addition to the data there is an additional element that may compel The Fed toward policy normalization via increased interest rates. With interest rates still very low historically The Fed is limited in the actions it could take should another recession take hold (this will eventually happen). By raising interest rates The Fed will then have the ability to lower them again as a corrective action if necessary. All told, it appears to us as though the conditions are in place for the Fed to take the next step toward policy normalization in the short to near future. Seeing a healthy economy feeding the inflation cycle, we are more comfortable taking risk in equities and credit than in duration. We do as always preach diversification; however, as many of you are aware with higher interest rates looming we have had many conversations about shorter durations on the bond portions of portfolios and made adjustments as necessary which we will continue to do.
At Financial Strategies Group, we believe our knowledge and expertise has a direct impact on the quality of advice we provide to our clients. That is why we are very excited to announce that Brice and Brandon Carter have earned the CIMA® designation. CIMA® stands for Certified Investment Management Analyst® and is a highly respected credential in the investment management and financial services industry. To attain this designation Brice and Brandon were required to complete rigorous requirements set by the Investment Management Consultants Association. These requirements included passing a qualification exam, passing a 4-hour certification exam and completing coursework through an IMCA approved education partner. With the addition of the CIMA® designation Brice and Brandon are among a select and elite group of advisors to have the CIMA®, CFP® (CERTIFIED FINANCIAL PLANNER™) and ChFC® (Chartered Financial Consultant®) designations.
Please join us in congratulating Brice and Brandon!
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