Brian Westbury, Chief Economist at First Trust Advisors, has long been a voice of reason in the financial industry. While many economists chase the consensus opinion, he has never been afraid to stand alone among his peers. As independent thinkers ourselves, we have paid attention to what comes from minds like his for many years.
Last week, the Federal Reserve did what almost everyone expected, raising the target range for the federal funds rate by 25 basis points to 1.00% - 1.25%. Westbury wrote a concise article that summarized five key takeaways about the Fed’s most recent move.
Here are the takeaways from the Fed’s June 14th statement, its updated forecasts, its plan for reducing the size of the Fed’s balance sheet, as well as Fed Chief Yellen's press conference:
- Although the market consensus is that the Fed isn't going to raise rates again until 2018, the Fed thinks we still have one more hike to come in 2017.
- The Fed has a concrete plan to start reducing the size of its bloated balance sheet, which is likely to start later this year. For the first three months of implementation, the Fed will reduce its balance sheet by $10 billion per month. Every three months thereafter, the monthly balance sheet reduction will rise by $10 billion, until it reaches $50 billion per month.
- The Fed is expecting a little more economic growth this year, less unemployment, and less inflation. However, projections for economic growth and inflation remain unchanged beyond this year.
- The Fed is not impressed by the recent softness in inflation and does not think that softness is a reason to change the projected path of monetary policy. Although the Fed acknowledges inflation has receded below its 2% target, it predicts inflation will head back to 2% in the medium term.
- The Fed is no longer as concerned about the potential negative influence of foreign events.
Westbury still thinks the most likely path is that the Fed uses the September meeting to make its last interest rate hike of the year while also announcing that balance sheet reductions will start October 1. He also thinks long-term Treasury yields will be moving up significantly later this year, with a 3.00% target for the 10-year Treasury Note by the end of the year.
While Westbury feels slow growth is the mantra these days, Karin and I wouldn’t be surprised if a market correction happens this summer. That is normal for more market cycles than not, based our 20 years of experience.
Westbury wrapped it up by saying, “The most disheartening part of the today's Fed releases was that the plan for reducing the balance sheet noted that the Fed stands ready to use quantitative easing again. We don't think QE helped the economy and had been hoping the Fed had learned that lesson. Apparently not.”
Forecasts are just that…forecasts. Famed economist John Kenneth Galbraith (1908-2006) once quipped, “The only function of economic forecasting is to make astrology look respectable.”
Rather than try to navigate what these forecasts and predictions may mean for your portfolio by yourself, we recommend you work with a qualified advisor, preferably a Certified Financial Planner, to develop goals that make sense for you and are likely achievable. Next, hire a legal fiduciary, a Registered Investment Advisor (SRQ Wealth Advisory, a subsidiary of SRQ Wealth is an RIA) to manage your money in your best interests to help meet those goals. Finally, you must have a dose of Faith, Patience and Discipline to help see you to the finish line.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.