The most recent Federal Reserve meeting was unusually noteworthy for more than one reason.
For starters, it was the last one with Chairman Ben Bernanke at the helm. New Chairman Janet Yellen took her oath on Feb. 3, and she will lead the next gathering on March 18-19.
But I believe the second noteworthy thing about the gathering is more important when it comes to determining the future direction of monetary policy. Specifically, all 10 voters actually approved the announced move to taper the size of the quantitative easing (QE) program by another $10 billion to $65 billion.
How hard has it been to get the entire body of Fed voters to agree on policy? Well, this was the first unanimous policy vote going all the way back to June 2011. Either policy doves or policy hawks had been dissenting at every meeting since that time … but that’s no longer the case.
|On Feb. 3, the entire body of Fed voters made a unanimous decision — the first time since June 2011.|
Just consider that Chicago Fed President Charles Evans — one of the biggest doves around — said in January: “Successively through each meeting — I can sort of imagine 10 (billion dollars in cuts) — but if we get closer to the end, or if things are doing even better, I can see adjusting to somewhat more aggressive reductions.”
Then in February, the hawkish Philadelphia Fed President Charles Plosser said: “The longer we continue purchases in such an environment, the more likely we will fall behind the curve in reducing the extraordinary degree of monetary policy accommodation,” and that “With the economy awash in reserves, the costs of such a misfire could be considerably higher than usual, fomenting higher inflation and perhaps financial instability.”
Finally, centrist Atlanta Fed President Dennis Lockhart called tapering the “default mode” for policy. He added: “Absent a marked adverse change in the outlook for the economy, I think it is reasonable to expect a progression of similar moves, with the asset purchase program completely wound down by the fourth quarter of the year.”
The message couldn’t be clearer from around the U.S., and from across the spectrum of Fed policymakers. Quit looking for QE to bail you out … because barring some massive economic catastrophe, it’s going away.
The elimination of QE will have marked effects on the interest rate markets. If you consider that even the mere mention of a possible future tapering of QE helped drive rates sharply higher last summer, the actual end of the QE program should put even more upward pressure on rates.
That necessitates all kinds of new interest rate strategies. I recommend continuing to avoid long-term Treasury and municipal bonds, as well as vulnerable emerging market debt. I’d keep any fixed-income money in short-maturity, short-duration ETFs, mutual funds or individual bonds. And I’d avoid sectors of the stock market that are overly exposed to rising interest rates, such as REITs.
Finally, pay close attention to the remarks of the new Fed Chair Janet Yellen in the days and weeks ahead. They will help provide some clues on the evolving direction of Fed policy considering she is now in charge.
Until next time,