Written By Nathan White, Chief Investment Officer
There was quite a bit of anxiety leading up to last week’s decision by the Federal Reserve on whether or not we would get the first interest rate increase in over nine years. Surprisingly citing overseas uncertainty, they decided upon no change and slightly lowered their forecast for the path of future rate increases. There are very heated debates about the pros and cons of continuing the current Zero Interest Rate Policy (ZIRP) and many valid points being made by both sides. The Fed “officially” introduced more uncertainty last week by openly using overseas (i.e. China) volatility and weakness as the reason for continuing with zero interest rates despite the decent progress of the U.S. economy. While I understand the Fed’s reasoning and with inflation so low they can be justified in not raising rates yet, but it seems each time they get closer they trot out a new reason (justified or not) for holding off.
However, I believe this is now starting to create too much uncertainty and mixed signals which begs the question of when will the time ever be right to move off the zero bound? The Fed is indeed trapped at this point as monetary policy has done about all it can and the longer it has to keep rates at zero is more indicative of a general economic malaise. I do however think the economy is strong enough to raise rates a bit and it would actually help free up frozen capital, aide savers, and restore the healthy discipline of normal price signals. Overly easy monetary policy basically steals from the future in that it pulls demand forward leaving us with less economic growth in the future when it has to get paid for. The current monetary policy is still commensurate with an economy in crisis and we are well away from that condition. The longer the Fed has to stay a zero or delays raising rates runs the risk of never getting out or moving dramatically in order to play catch up. Both of those scenarios are not good.
OK, enough of my diatribe….What are our current plans and actions?
The net takeaway from last week’s decision was that we did not learn anything that would want to make us take more risk at the current time. Our models are still telling us to be cautious at this point. The speed of the August decline did create a short-term oversold condition, but we were ready ahead of that. We do not see a recession in the cards at the current time, but the markets are still trying to adjust to new dynamics (i.e. slowing profit growth, emerging market risk, effects of reversing the Fed’s easy money policy, etc.). That can give us the opportunity to get assets at cheaper prices. So for now we would sell some if we rally back towards the pre-August levels and buy some on dips toward the lows. The cash we are holding in the portfolios gives us the flexibility and protection to take advantage of the current environment.
For those so inclined here’s a great take on the Fed’s move in the WSJ: http://www.wsj.com/articles/the-federal-reserve-pulls-a-lucy-1442531250
Disclaimer Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.