For simplicity’s sake, let’s consider chair of the Reserve Jerome Powell to be the captain of the largest ship in the sea, with the other much smaller central bank boats following behind. Make no mistake, the wake and ripples made by the mothership impact the smaller central bank tugboats as they navigate the economic waters.
The U.S. Federal Reserve met yesterday during one of their regularly scheduled meeting times. The Fed has been holding steady with interest rates at zero while continuing to buy assets in the open market, also known as their “asset purchase program”, both of which help stimulate the economy. The Fed will ultimately begin tightening financial conditions by reducing the amount of assets they are purchasing, also known as tapering, and will subsequently increase interest rates. Important to note, the former will take place before the latter. As a result, investment markets have been anticipating an announcement from the Fed as to when they will begin tapering these asset purchases. They have consistently stated that they are waiting for “substantial further progress” in terms of two metrics: 1) labor market recovery 2) inflation. In Chair Powell’s press conference yesterday, he stated that the U.S. economy has achieved sufficient progress on the inflation front and are very close on the labor market front. As a result, he indicated that it will be appropriate for the Federal Reserve to begin “tapering” very soon. He also mentioned that “tapering” is likely to have run its course sometime near the middle of 2022. In addition, Chair Powell also noted that the projection of interest rate increases submitted by each member of the committee now show interest rates potentially moving higher in late 2022, while others are holding steady at early 2023.
What does this all mean? Suffice it to say that we now have a clearer path or road map from the U.S. Federal Reserve. In the absence of any major economic shocks, one should anticipate the Fed to begin tapering before the end of 2021, have completed tapering by mid 2022, and they are likely to begin raising interest rates at the end of 2022. Although the Federal Reserve will proceed cautiously, as they always have, we have more clarity on how close we are to entering a period of tightening financial conditions.
The investment markets received this update from the Fed very well, stocks remain very stable while interest rates were little changed. From a longer term economic and investment portfolio perspective, rest assured that the economy can still grow when financial conditions are tightening while your investment portfolio can still produce robust returns. However, company debt levels and company risk exposures are more likely to have a brighter light shone on them when the Federal Reserve boat begins pulling the life raft lines closer and closer inboard. Here at Matco, our M-Factor investment process helps us narrow in not only on companies with excellent growth potential, but also avoiding companies with unnecessary risk exposures. We have also positioned our Matco Fixed Income Fund with adequate insulation against the negative impacts of rising interest rates. If you would like to discuss the Federal Reserve’s monetary policy or your investment portfolio’s risk exposures in more detail, please don’t hesitate to contact me.
Please contact me, Trevor Galon, if you would like to discuss further.
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Trevor Galon, CFA
Chief Investment Officer
Founded in 2006 to manage and service seven family offices, today Matco offers the benefits of our extensive investment management experience to individual investors, foundations, endowments, condominium corporations, trusts, corporations and not-for-profit organizations.
Our mission is to simplify the investment world for our clients by understanding their needs and providing exceptional investment solutions that preserve and grow capital.