Stock prices acted appropriately in response to the Fed’s announcement. There’s no way to sugar coat what the Fed did. Having already moved 25% of my equity portfolio to cash, I’ll now move another 25% to cash.
The unanimous decision by members of the Fed’s Open Market Committee ignored all signals coming from both financial and commodity markets. Instead, of looking at financial markets, which look to the future, the Fed looked backward at the economy and concluded everything was fine. They ignored all signs suggesting the Fed was becoming overly restrictive.
While it’s possible the financial signs are all wrong, it’s also possible the Fed is wrong.
The prudent action would have been to postpone any move to make monetary policy more restrictive and wait six weeks for its next meeting. Instead, the Fed decided to “dam the torpedos” and ignore the possibility it had already become restrictive. It doubled down on any restraint by raising interest rates, continued to sell $50 billion in securities each month and laid out a plan for further restraint this coming year.
The 600 point swing in the Dow that followed the Fed’s announcement strongly suggests the Fed is on the same path today that it took in 2008. If so, stock prices will head even lower in the months ahead.
As in 2008, the Fed will eventually figure things out and make the right move. While I hope I’m wrong, the fact that today’s potentially destructive decision was unanimous and so hardheaded provides little comfort this Fed will do the responsible thing any time soon.
Blog with Dr. G
A candid look at pertinent current events that play a role in our daily lives.