After months of uncertainty about central bank policy — from the rumors of “tapering” back on quantitative easing to the tug-of-war between Larry Summers and Janet Yellen over who will succeed Ben Bernanke as Federal Reserve Chairman — investors had hoped some clarity would emerge in September.
On Wednesday, the Federal Open Market Committee concluded a two-day policy meeting … and pretty much ruined that idea.
After a lot of talk about tapering back its $85 billion a month in bond buying, the Federal Reserved voted 9-1 to keep on keeping on with its purchases of Treasuries and mortgage-backed bonds.
The good news is that the U.S. stock market hinted in the run-up to today’s event that it was pretty complacent in regards to cutbacks in QE or other central banking efforts. After all, the S&P 500 had inched back up into record-high territory with a 4% improvement since Aug. 30 — partly in anticipation of this week’s FOMC event.
After the event showed Bernanke is going to keep the pedal to the floor, stocks exploded briefly higher intraday.
But where do investors go from here? Should we expect QE Infinity and continued gains? Or should investors take this as an opportunity to get out while the getting is good?
Don’t Overthink the FOMC
In a nutshell, you should just keep doing what you have been doing since things aren’t going to change a whole heck of a lot.
Wednesday’s event proved that, if ever there was any doubt.
Those who contend the Federal Reserve eventually has to make a big move on rates or QE need to do some more reading about Japan. Since the late 1990s, the Bank of Japan hasn’t had a benchmark interest rate of more than 0.5% and key rates have been pretty much zero since the dot-com crash, barring a brief tightening in 2007 before the bottom fell out of the global economy.
Remember: There’s no reason the Fed has to do anything different. Today’s move is a validation of that, so take it to heart.
It’s also important to remember that we are caught in a feedback loop where rates and economic growth are fighting against each other. If economic growth continues to inch higher, with continued strength in housing and the slow-but-steady declines in the U.S. jobless rate, then the environment might be right to ease off stimulus at the Federal Reserve. However, anything more than a mild easing off QE — for instance, moving key interest rates off their near-zero levels — could create a headwind for businesses and lending. That would undercut any recovery.
Taken together, these two ideas mean that central bankers and Bernanke aren’t in a position to do anything dramatic or surprising. In all honesty, the biggest move the Fed could have made would have been a mild taper, to the tune of a few billion dollars less in bond buying, and nothing that would even approach a significant shift in central banking policy.
That’s the reality of the balancing act between tightening policy and supporting growth. And until this uncomfortable reality changes, expect the status quo.
The market seems to have made its peace with a modest tapering of bond buying thanks in part to the long walk-up to this week’s FOMC. So it’s feasible that in the near future we still could actually see a $5 billion or $10 billion reduction in QE bond buying.
But without a pressing need to change course or market expectations of a dramatic shift, investors should have confidence in business as usual at the Fed and for the stock market.
Of course, given the stubbornly high unemployment rate and anemic global growth … more of the same doesn’t necessarily mean that things will be hunky-dory. Getting what you expect is good on some levels, but when you expect a challenging economic environment, it’s obviously not ideal.
- The Fed keeps its asset-buying plan in place. (MarketWatch)
- A history of Japan’s interest rates. (Trading Economics)
- Will Yellen push more stimulus if and when she takes over the Fed? (Bloomberg)
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.