Tuesday, June 21, 2016

Never fight the Fed or always fade the Fed? Depends on asset class

The following chart shows the FOMC's participants' views on rates from the dot plots at the end of each year. No question that the FOMC forecasts have done a poor job of determining the level of rates. (The chart is from the Aleph Blog.)

This FOMC "skill" provides an interest tale for investors to follow. There is the old adage, "Never fight the Fed." if you are an equity investor. We might be able to provide a new second adage, "Always fade the Fed's interest rate forecast." Hold your fixed income when the Fed cannot come close to getting interest rate forecasts correct. Perhaps the two go together, strong equities because the Fed will err on the side of caution with respect to raising rates.  Nonetheless, these adages are interesting food for thought.

This relationship will not last forever, but right now there is no evidence to suggest that there will be any improvement or change in the behavior of the Fed. The dot plots were supposed to provide some forward guidance on expectations, but they have turned into mis-guidance.

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