The Fed recently enacted what the experts are calling a historic policy change. More accurately, it’s the official acknowledgment of what the Fed has already been doing, namely keeping interest low, seemingly forever. What it also means is that it sharply alters the old 60-40 investment mix, to something more like 80-20 or 80-10-10.
The Fed is basically assuming that inflation will be nonexistent – or, at least manageable – for the foreseeable future and is, therefore, willing to let it run “hotter” for longer than it used to before it steps in and raises interest rates. But is that a realistic assumption? Nearly unanimously, Fed officials have been touting the party line that the economy is bad – despite numerous reports that show it is snapping back pretty strongly – and is likely to stay that way or get even worse – which may not be the case. The stock market certainly doesn’t seem to be buying that.
What the Fed seems to be doing is baking in the cake its already oversized role in the economy (and society) and keeping it that way “for as far as the eye can see.”
As I noted in my previous column, cynics might draw the conclusion that the Fed is purposely dumbing down its economic forecasts so as to cement its role for the long-term. Jerome Powell’s streamed announcement at the Jackson Hole summit pretty much made that de facto.
So what does that do for your portfolio? Given that the Fed has now determined that rates will stay low for the foreseeable future, do bonds have any place in your portfolio? What would be the point? Continue reading "The Fed Makes It Official"
