As predicted by many market-watchers, the Federal Open Market Committee announced on January 29 that it would continue to cut its monthly bond purchases. Citing the continued moderate expansion of the U.S. economy, Fed Chairman Ben Bernanke moved to trim the bond-buying program (known commonly as “quantitative easing” or “the Fed taper”) from $75 billion per month to $65 billion. Bernanke additionally announced that the Fed’s policy of supporting near-zero short-term interest rates would continue indefinitely. Short-term interest rates, which govern the rates at which financial institutions borrow from one another, have a cumulative effect on all loans; in deciding to keep the federal funds rate target rate between 0% and 0.25%, the Fed reiterated its focus on stimulating the economy through availability of capital.
Several things came to mind as I read through the announcement:
- What does this mean for investors? Despite a little bit of turmoil in the markets during the run-up to and in the wake of the announcement, this round of quantitative easing will have very little impact on investors who are well-diversified and in it for the long haul. Asset allocation for breadth and depth, across markets and sectors, is still the “status quo” strategy for our portfolios.
- The Fed remains bullish about U.S. recovery. It’s hard not to see the continued expansion of the taper as a vote of confidence for the overall recovery of the U.S. economy. Chairman Bernanke specifically reiterated the Fed’s forecasts for 3% growth in 2014 and 2015 during the announcement. Low interest rates are good for the economy and for investors. And the Fed’s continued assertion that it will keep those interest rates low “well past” the point where the unemployment rate reaches 6.5% builds in some favorable long-term perspective.
- Emerging markets are in for more volatility. The algorithm here is simple: as investors look to the U.S. as the first-world economy with the most upside potential, the flow of capital out of emerging markets and into the resurgent domestic economy may accelerate. This may retard emerging market recovery. At best, it will do little to quell the correction that has been bleeding emerging market investors since the spring.
At ACM, we’re inclined to follow the Fed’s lead and “stay the course” with our traditional focus on breadth and depth across markets. We’ll certainly be paying attention to the next rounds of tapering as they take place, but for right now, we’re taking it in stride.