Wesley's Rant: Jackson Hole, Federal Reserve, and Tapering
Friday, August 27, 2021
One of the things that you can count on when it comes to successful long-term investing is that the amount of noise that can create particular duress will genuinely test the emotional component of investing. Perhaps the biggest challenge an investor faces when not working with an investment professional is the ability to control ones' emotions. Just look at the last ten days when it comes to the noise created:
- The turmoil in Afghanistan,
- the news about the COVID-19 "Delta" Variant, and
- the suggested Government Mandates, etc.
The initial reaction of the equity markets was to have three negative days in the markets. Then without much fanfare, the equity markets close at record highs a few days later. The recent noise is not related to any economic events but linked to our world's global situation.
In the next week or so, we may have some economic noise created by The Federal Reserve and the annual meeting of the world's financial titans in Jackson Hole, Wyoming. This year the conference will be virtual and not in person. I expect you to hear about the process of "tapering," and its possible impact on economic growth, and the possible impact on the equity and bond markets. The definition of tapering is the process of gradually lessening or reducing something.
When that process involves the Federal Reserve, it means the gradual slowing of the pace of the Federal Reserves' large-scale asset purchases. Looking at the chart below, you can see how the Federal Reserve has responded to the two latest economic crises since 2008. The Federal Reserve's balance sheet has increased dramatically since the financial crisis of 2008 and a basic double since COVID-19 arrived in March of 20201.
Since July of 2020, the Federal Reserve has been purchasing 120 Billion dollars of assets each month.
The breakdown has been $80 Billion of Treasury Securities and $40 Billion of agency mortgage-backed securities each month. The balance sheet of the Federal Reserve has now reached 8 Trillion dollars. In the last two meetings held by the Federal Reserve, it has publicly acknowledged that the members have discussed the idea of when to start the tapering process. In other words, at some point, the Federal will cut back on the number of assets it has been purchasing over the last 12 months. The primary purpose of these purchases is to keep interest rates near zero, making it possible for businesses and individuals to borrow money at low-interest rates. It is one of the tools used by the Federal Reserve to stimulate economic growth.
The Federal Reserve has been transparent in stating that it does not intend to raise interest rates until 2023 at the earliest. One of the criticisms of the Federal Reserve is that it has been too slow to change course and that now it has created a rise in inflation that will continue to be with us for years to come. Some of you may remember the late 1970s and early 80s. Inflation can be a real issue, and it tends to punish the middle class the most. The bottom line is that the Federal Reserve has mentioned tapering in its last few meetings. Therefore, this is a way to telegraph to the investment markets that probably before year-end that it will start to reduce the number of asset purchases it does each month. The Federal Reserve has a long way to go before it even thinks about raising short-term interest rates.
This bottom line concept means that we will continue to have a straightforward monetary policy over the next 12-24 months.
Historically, this is not great for fixed-income investors but good for equity investors. On top of this tapering noise, our politicians will return from their summer recess after Labor Day and begin to debate an additional $3.5 Trillion of new spending. At that same time, our country will reach its debt limit, and we will talk here about government shutdowns, the "catastrophic" results of a possible shutdown, and why and how to avoid it at all costs. Do you doubt that both sides of the political aisle won't agree to spend more money that we don't have?
When you read the "headlines," you can always find a reason not to invest. The noise can be loud, scary, and some investors can get caught up in the moment and reactionary by their emotions. Long-term successful investing takes discipline, realistic expectations, and a focus to stay the course. If you are investing on your own, I wish you luck. However, if you are working with an investment professional and the noise is getting to you, I suggest you pick up the phone and give your advisor a call. There is a "Wiser" way to invest!
Managing Partner, The Wiser Financial Group
Footnotes, Sources, and Disclosures
- (Chart) 2021 Federal Reserve H 4.1 via Haver Analytics, Hutchins Center on Fiscal Monetary Policy at Brookings (https://www.brookings.edu/blog/up-front/2021/07/15/what-does-the-federal-reserve-mean-when-it-talks-about-tapering/)
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The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC, or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor about your individual situation. Comments concerning the past performance are not intended to be forward-looking and should not be viewed as an indication of future results.