As the Federal Reserve draws closer to the final stages of its QE tapering process, asset managers are increasingly curious about how their funds may be impacted by higher interest rates and changing market conditions. This month, we encountered five thought pieces that seek to understand the Federal Reserve’s role in the marketplace and examine how asset managers respond to any news (or lack thereof) affecting monetary policies.
2. PIMCO: For Wonks Only – Bill Gross analyzes the structural requirements of a credit-based economy, ultimately highlighting the importance of clear, committed central bank policies in maintaining financial order. To this end, he compares how the Federal Reserve and Bank of England have done a relatively good job in recent years of keeping interest rates low enough to encourage growth but high enough to remain solvent. However, the expansion of available credit in the economy is not in itself a sufficient condition for economic growth; rather, growth depends on the efficient use of that credit.
3. Lord Abbett: The Fed’s Labor Pains – Milton Ezrati evaluates the Federal Reserve’s decision making process and incentives as they relate to the U.S. labor market, as the Fed has stated repeatedly that its future monetary policies are dependent on the direction of unemployment figures. The author examines the complications present in many of these metrics, however, such as the likelihood that declining unemployment is more of an indicator that people have dropped out of the labor market than of more people finding work. Ezrati’s reasoning is similar to considerations made by Fed policy makers, who are very aware that they will need to consider all factors at play in the labor market instead of relying solely on the official unemployment rate.
4. Federated: Will “Considerable Time” Get Axed? – Criticizes the vague language that the Federal Reserve sometimes uses to describe its future policy actions, citing the Fed’s comments that it will stick with its current, highly accommodative policies for “a considerable time” before coming to any conclusion about next steps. Many city-level Fed leaders feel that this language only clouds the issue and wish that the national office had a clearer vision for describing their research and decision making process, which ultimately deserves more attention.
5. Fidelity: Invest for Uncertainty – Discusses the general sense among investors and advisors that interest rates are on the verge of a significant bump as Federal Reserve QE measures reach their conclusion. However, interest rates are difficult to forecast and there is no way of know how the Fed may or may not respond to future crises or market conditions, so fretting about exactly how to invest for higher interest rates is not productive. Instead, the piece argues, fixed income investors should employ a diversified portfolio strategy, including assets like short- and long-term bonds, that helps to mitigate overall volatility.