Food for Thought: A Commentary on Fed Rates

By Joel S. Vergel de Dios

Financial Consultant, LPL Financial

At the height of the Great Recession, it was heavily debated whether the Federal Reserve was wise to take the Fed Funds rate down to zero while aggressively stepping up its balance sheet through its asset buying program - otherwise known as Quantitative Easing.  In its wake - despite loudly voiced concerns ranging from the QE exercise doing nothing more than making the wealthy more wealthy to it being an affront to free market principles - the subsequent record economic recovery and expansion may be viewed as vindication of Fed actions, at least in the short term.

Over the last ten years, those who have attended our bi-annual Outlook Seminars have heard me repeatedly use medical analogies in addressing the Fed's policies: with the Quantitative Easing measures acting as potent medication (or even life support) for a sick patient, i.e. the Economy.  As the recovery became evident, many questioned why the Federal Reserve continued its dovish stance.  I had iterated then that the Fed, as the 'Monetary Policy physicians', needed to strike the delicate balance between weaning the patient off the heavy medication and determining if it could survive without intervention.  Indeed, as the Federal Reserve announced in 2018 that they were going to raise interest rates, the equity markets - in many ways, the emotional alter-ego of the economy - gasped in horror!  The markets expressed concerns, evidenced by the precipitous drop from October to December 2018, that the economy may not be able to survive the Fed's move toward normalcy.  It needed assurances from the powers that be that they will continue to hold the patient’s hand and be sensitive to the data as they became apparent.  Given the pledge of data dependency from Fed Chairman Jerome Powell, the markets were calmed and witnessed a resounding V-shaped rebound to date.

The rhetoric of the recent weeks has left me concerned.  Calls for a .50% reduction in the Fed Funds Rate lead me to wonder whether the current administration and its advisers foresee a recession in the very near future.  Independence from government notwithstanding, I question whether it is the Federal Reserve’s function to preempt an economic slowdown by prescribing an aggressive battery of medication.  Should a physician prescribe treatment in anticipation of an ailment that (based on Fundamentals) may not be imminent?  Or, should he/she stand ready to act if and when a diagnosis is made?  I would lean toward the latter, lest we become addicted to the medication instead of allowing the patient to rehabilitate and survive on its own.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, consult with your financial advisor.

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