A follow up to the February 2, 2022, REDW Wealth Management Webinar, Shifting Federal Reserve Policy & Potential Market Impacts
Federal Reserve policy updates have economists and investors discussing potential impacts to bond yields and the markets. What pivots on monetary policy is the Fed expected to make in 2022 and what could our potential responses be?
At the Fed’s January meeting, it announced that it is maintaining a zero to 25-basis point target rate (.00-.25%), with plans to taper their asset purchases to zero by early March. The implication is that they will soon raise the Federal funds rate, with the first hike coming in March. However, this doesn’t mean the Fed is selling bonds — they are simply loosening their borrowing by allowing assets to mature off the books. This will most likely happen by early May and will cause bond yields to rise and put downward pressure on equities.
Key takeaway: Rate hikes are coming between now and May — sooner, instead of spread out over the next two years. Depending on the type of investor you are, these changes could result in increased portfolio volatility, a change in investment income, changes in your portfolio risk profile, or a combination of these factors.
CURBING INFLATION IS A FED GOAL
Any change in messaging or tone from the Fed results in volatility. Research from Northern Trust suggests that, on average, equity markets tend to fall after Fed rate hikes begin. Then equity markets usually tend to produce positive returns over the subsequent year.
Current fluctuations in the equity markets could be from the Fed’s goal to curb inflation by putting a lid on demand, and geopolitical concerns (like the evolving situation in Ukraine). Equities markets don’t like uncertainty.
Key takeaway: If the Fed’s focus continues to be fighting inflation, we might expect to see more volatility in equities.
Global inflation is expected to peak in the first half of 2022, and to decline gradually to remain somewhere beneath where it was in December of 2021. But it’s not going to be a straight ride down — expect some equity and bond market volatility. Nonetheless, when it comes to credit, corporate fundamentals remain strong.
Key takeaway: Focus on your overall allocation and adopt a disciplined approach to investing. There’s nothing compelling right now to shift your allocation one way or the other.
THE BOTTOM LINE
The Fed is focused on curbing inflation. Research suggests that we might be at a structural shift in terms of full employment. A very tight labor market might force increased wages, a different type of inflationary pressure that could happen this year and which we didn’t see last year.
Key takeaway: Expect the Fed to reduce the money supply through open market actions to help put a ceiling on inflation.
WE WELCOME YOUR QUESTIONS
Contact REDW Wealth trusted advisors Robert Papelian or Robert Elzholz to further discuss updates or impacts of Fed policy changes and your wealth management concerns.
Access the February 2, 2022 REDW Wealth Management Webinar, Shifting Federal Reserve Policy & Potential Market Impacts »
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