September 19, 2013 | By Scott Minerd
Yesterday’s message from the Federal Reserve was both a surprise to the markets and contradictory. Fed Chairman Ben Bernanke made clear that the central bank’s primary monetary policy tool is forward guidance. However, in choosing not to taper the asset purchase program despite previous indications of an eventual reduction, the Fed raised questions about the credibility of forward guidance. This action will likely have two outcomes for markets. The first we saw begin immediately following the announcement – and that is that interest rates moved materially lower and could continue to do so. The other is that volatility will escalate because market participants will continue positioning portfolios based on what the Fed says can be expected, but will also be forced to try to guess whether the Fed will alter its course depending on the economic data. Yesterday’s announcement of ongoing accommodation was positive in the short-run for stocks, but I believe it will prove to be better for bond investors over a longer time horizon. The Fed opted not to taper because the economic outlook is weakening, particularly in housing. The Fed also reflected this view by lowering its economic forecasts. The result of lower growth will likely be reduced corporate earnings and thus, lower share prices. Lower growth will also keep downward pressure on interest rates, which is constructive for fixed income. It is my view that the yield on the 10-year Treasury bond could ratchet back down to or below 2 percent before this rally is over.
Since the U.S. Federal Reserve first began to release economic projections three years ago, it has consistently downgraded its outlook. In the latest Federal Open Market Committee meeting, the Fed further lowered its projections for GDP growth in 2013 to an average of 2.15 percent, compared with an average of 4.15 percent from its initial projections in January 2011. Despite a steady decline in the unemployment rate, the continuing downgrades of the growth outlook demonstrates that the Fed has been overly optimistic about the underlying strength of the U.S. economy, which supports the decision to delay the tapering of quantitative easing.
Source: Federal Reserve, Guggenheim Investments. Data as of 9/19/2013. *Note: The projection range is the central tendency of the FOMC’s economic forecast, and middle-points of the range are the average of the central tendency projections.
This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. This article contains opinions of the author but not necessarily those of Guggenheim Partners or its subsidiaries. The author’s opinions are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC. ©2014, Guggenheim Partners. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.
Examining the Fed’s announcement to sell its SMCCF holdings.
Strong earnings growth, low default volumes, upward rating migration, and tighter spreads in the recovery phase of the credit cycle.
A Green New Deal should not be viewed as a big government program, but as an opportunity to reinvent vast swaths of the U.S. economy while pursuing the laudable goal of carbon neutrality.
Portfolio Manager Adam Bloch and Matt Bush, a Director in the Macroeconomic and Investment Research Group, share their outlook for the first quarter 2021.
Scott Minerd, Chairman of Investments and Global CIO, discussed his outlook for markets and the economy with CNBC’s Brian Sullivan during the Milken Institute 2020 Global Conference.
You are now leaving this website.Guggenheim assumes no responsibility of the content or its accuracy.
Your browser does not support iframes.
2021 Guggenheim Partners, LLC. All rights reserved. Guggenheim, Guggenheim Partners and
Innovative Solutions. Enduring Values. are registered trademarks of Guggenheim Capital, LLC.
how your browser accepts cookies; please see your browser help documentation for more