In the past year I have written two blogs, US Stocks Continue to Rise Despite Hawkish Fed Comments and Negative Earnings and The Fed’s Vacillation Increases Risk, commenting on how the Fed’s vacillation is creating market uncertainty. Last week on Friday (September 9th) and Monday (September 12th), the Fed was at it again. On Friday, Boston Fed President Eric Rosengren stated that the economy could “overheat” if the Fed does not raise interest rates soon. His comments seemed to align with recent statements from Fed Chair Janet Yellen and Fed Vice Chair Stanley Fischer. As a result, the Dow Jones Industrial Average lost nearly 400 points. Then on Monday, Fed Governor Lael Brainard suggested that the US economy was still too fragile for a rate hike, pushing the Dow up 240 points. Since the Fed claims that it is data dependent, one has to wonder why there is such divergence in sentiment.
As I said before, it seems the Fed is testing the market, sending up trial balloons, delivering hawkish comments to dampen stocks, but when the downdraft is too severe, appearing dovish to support prices. I am all for transparency which should reduce uncertainty, but the increase in communication with the opposing views has only created confusion. Credibility is waning.
But I could be wrong about the Fed’s motivations. Maybe they have not made a concerted effort to manage the markets. It is possible that the Fed presidents and governors like the limelight. Never before have so many people waited, with bated breath, to hear them speak, dissecting every word they say trying to glean information. It must be intoxicating. I can only surmise. But, suddenly, they have become superstars and perhaps they like the attention. Needless to say, I can only speculate, but I know the increased mixed messages have not benefitted investors. Quite frankly, we would be better off if the Fed would stop speaking altogether until they have agreed upon policy direction. That type of communication would increase transparency and give the market the information it needs. Until that time, we can expect increased market volatility when the Fed communiqués vacillate between raising rates and staying pat.
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Rick Cloutier, CFA is the Chief Investment Strategist for Washington Trust Bank with over 25 years of portfolio management and investment experience. He is responsible for directing the portfolio management, research, and trading activities for the bank’s multi-asset class strategies. He is also responsible for overseeing the client portfolio manager team and portfolio analytics team. Rick has written numerous articles for Investopedia and wrote a weekly column for the Fall River Herald News in Massachusetts. His research has appeared in numerous journals, including the Journal of Investment Management and Financial Innovations, the Journal of Business Management and Economics, and the International Journal of Revenue Management. He provided a nightly commentary on WALE radio and authored the novel Caveat Emptor. Rick earned his MBA at Boston University.