The Fed and Their Follies

In a November, 2010 Washington Post op-ed piece, former Fed Chair Ben Bernanke wrote, “The Federal Reserve cannot solve all the economy’s problems on its own.” After the setbacks of the U.S. economy in recent years, some Fed skeptics might wonder what problems Bernanke thinks the Fed has solved. Some may challenge the notion our central bank can do anything at all about the economy other than inhibit it.

According to a recent interpretation of the Fed minutes in Euronews, at least some members of the Federal Open Market Committee (FOMC) share those doubts.  Call it rate-raise anxiety: To tinker or not to tinker with the economy?

While most FOMC members went along with last December’s decision to raise rates, some found it “difficult to reconcile” indications of market weakness with what many believed at the time was a recovered U.S. economy.

Since the January meeting, Fed Chair Janet Yellen has announced our central bank still expects to raise rates gradually in 2016.  But she also claimed a weakened global economy and a steep slide in stock markets were tightening financial conditions faster than she and her colleagues would like.

Some critics argue openly with Fed decisions. One such critic is Lawrence Summers, former Secretary of the Treasury and Chief Economist at the World Bank. He feels the global economy is currently afflicted with “secular stagnation,” meaning it offers less aggregate demand for products and services. Under the circumstances, Summers feels central banks and governments ought to promote growth rather than apply brakes via even minor rate hikes.

Janus Fund Portfolio Manager Bill Gross also challenges Yellen, and ultimately all central bankers, on a more fundamental basis, stating the anti-Fed argument even more bluntly:

“The Fed, global central banks, and their fixation on statistical modeling to influence monetary policy, as opposed to common sense and financial regulation…They all seem to believe that there is an interest rate SO LOW that resultant financial market wealth will ultimately spill over into the real economy. I have long argued against that logic and won’t reiterate the negative aspects of low yields and financial repression…. What I will commonsensically ask is ‘How successful have they been so far?'”

In other words, suggests Gross, the Fed should take a laissez-faire approach to the economy if they really want to get it moving. Perhaps he forgets that central bankers, like all government officials, need to justify their jobs by occasionally doing something. Thus the Fed’s already tested the waters with the December rate hike, the first of a projected series of raises in almost a decade.  Unless, of course, they don’t…

But take heed: Fed rate increases, or even months of “will they or won’t they” waffling, will take their toll on the value of your portfolio.  A rate increase makes borrowing more expensive for businesses, thus slowing their rate of growth.  Ultimately, such a slowdown can have a downward impact on a company’s stock price.

That makes this brief respite a good time to review your stock portfolio.  If you’re fortunate enough to be ahead in a particular stock, consider taking those profits and moving them over to tangible assets like physical gold.  That way you not only have a safe haven if the market tanks, but you secure those gains, since if that company relies on borrowed capital to expand, their stock price could decline fast.

Certain economists are now being less sheepish in suggesting the Fed might have jumped the gun with a rate increase.  While the markets may have experienced temporary relief, many S&P stocks still have not recovered. Rather than take a wait-and-see attitude about the effects of an ill-judged rate increase, you’d be wise to take preventative, not to say protective, action before the Fed gently, paternally walks us to the poorhouse.