Home   Logon   Mobile Site   Research and Commentary   About Us   Call 1.800.621.1675 or Email Us       Follow Us: 

Search by Ticker, Keyword or CUSIP       
 
 

Blog Home
   Brian Wesbury
Chief Economist
 
Click for Bio
Follow Brian on Twitter Follow Brian on LinkedIn View Videos on YouTube
   Bob Stein
Deputy Chief Economist
Click for Bio
Follow Bob on Twitter Follow Bob on LinkedIn View Videos on YouTube
 
  Don't Obsess About the Fed
Posted Under: Government • Monday Morning Outlook • Fed Reserve • Interest Rates

When it comes to monetary policy, one thing looks certain for 2019 - journalists, pundits, investors, and analysts will pay it way more attention than it deserves.  The spotlight is currently on Wednesday, when the Federal Reserve will issue their first   statement of the new year.  The consensus expects no changes in rates, and we agree.

What would justify heightened concerns?  If investors believe monetary policy is about to get overly tight.  But that point is still a long way off.  Nominal GDP – real GDP growth plus inflation – is up at a 4.8% annual rate in the past two years, well above the 2.375% target for the federal funds rate or the 2.40% the Fed pays banks to hold reserves.

It's true, the Fed is also reducing its balance sheet, but it is doing so at a gradual pace of up to $50 billion per month.  That "up to" part is important because in many months the Fed will not have enough securities maturing to hit that $50 billion figure.  On top of that, reports suggest the Fed is rethinking how large to keep its balance sheet, potentially leaving it larger than many anticipated.  We think that'd be a mistake, but, if anything, it would represent a looser stance for future monetary policy.        

In the short-term, the Fed is likely to keep its language on assessing "realized and expected economic conditions," and Fed Chairman Jerome Powell will probably mention "data dependency" at the press conference following the meeting (the press conferences will now be held after every meeting, up from once per quarter).  

Unfortunately, the Fed will not only be guided by economic data, but market fears that the yield curve could invert.  We think if the Fed lifted rates as the economy grew, the yield curve would move too, not inverting until the Fed was truly tight.  But for fear of "what if?" the Fed will likely keep a "buffer zone" of about 40 basis points between the yield on the 10-year Treasury Note and the federal funds rate.     

If that holds true, an easy rule of thumb is that we won't see the Fed raise rates again until the 10-year yield hits 3.00%, we won't see a second hike until we get a yield of 3.25%, and won't see a third hike until the 10-year hits 3.50%.   

Instead of obsessing about monetary policy, investors should spend their time this year focused on the resilience of the economy.  For example, in spite of the partial government shutdown, initial claims for jobless benefits hit 199,000 in the week ending January 19, the lowest since 1969.  And auto analysts are forecasting solid sales of cars and light trucks for the month.  In other words, the data shows no justification for doom and gloom.  

Nothing lasts forever, economic expansions included.  But fueled by entrepreneurship, deregulation, and tax cuts, we expect this expansion - and corporate profits - to climb higher.  Let others waste their time dwelling on the Fed, wise investors have more important things to think about.   

Brian S. Wesbury - Chief Economist
Robert Stein, CFA – Deputy Chief Economist

Click here for PDF version

Posted on Monday, January 28, 2019 @ 11:03 AM • Post Link Share: 
Print this post Printer Friendly

These posts were prepared by First Trust Advisors L. P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
 
The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. By providing this information, First Trust is not undertaking to give advice in any fiduciary capacity within the meaning of ERISA and the Internal Revenue Code. First Trust has no knowledge of and has not been provided any information regarding any investor. Financial advisors must determine whether particular investments are appropriate for their clients. First Trust believes the financial advisor is a fiduciary, is capable of evaluating investment risks independently and is responsible for exercising independent judgment with respect to its retirement plan clients.
First Trust Portfolios L.P.  Member SIPC and FINRA.
First Trust Advisors L.P.
Home |  Important Legal Information |  Privacy Policy |  Business Continuity Plan |  FINRA BrokerCheck
Copyright © 2019 All rights reserved.