The Fed continues to un-amaze. If predictability is the key to a strong economy and strong markets, there is nothing to worry about.
On the other hand, if gridlocked politicians, North Korea, miscellaneous hurricanes and a wild-card president are relevant to the economy, well, perhaps attention should be paid.
Janet Yellen indicated that a rate hike, probably .25%, will come to pass in December with more to follow next year. She also said that the Fed will begin unwinding its balance sheet now, initially by not purchasing new securities as old ones mature. This will remove $10 billion a month from the balance sheet in the near term, gradually increasing to $50 billion a month within 12 months. Depending on how closely this plan is followed, returning to pre-2008 levels would take something over ten years, although we don’t know what the final level will be.
A lot can happen in ten years. We are almost ten years removed from the problems that led to low interest rates and quantitative easing in the first place. The beginning of World War II to the beginning of the Cold War took less time. The smart phone is just ten years old. Within ten years of President John F. Kennedy telling the country we had the resources and talents necessary to land an astronaut on the moon, we did just that. Perhaps all will go smoothly for the Fed and the economy, but it probably will not.
An asset reduction plan has never been tried by any Central Bank before, ever. There is no model, or historical precedent. No one to guide them. Given ten years to reduce the balance sheet, maybe it will all work out. That would require that the economy continue growing, longer by far than any other expansion before. Possible, but not very likely. So there may also be some severe downsides that we cannot control. Our job at Mitchell Capital is to monitor closely the things we cannot influence, and take action to control the things we can. No one can predict the future of markets. We can weigh events and probabilities, but there are no guarantees. We can invest in sound companies with promising futures and manage durations of fixed-income securities to balance risk and return. In this way we can try and preserve value in volatile markets while preparing for gains in economic expansions.
The Fed is only one piece of the economic picture. Taxes, healthcare, defense, regulation and more all make up a complicated web of interlocking influences. The Fed’s actions may have a disproportionate psychological impact on markets, but they are no less important for that.
There is much to watch in the months and years ahead.
