The Federal Reserve Monetary Policies – Do They Impact Your Portfolio?
Hey, I’m Chris Perras, Chief Investment Officer with Oak Harvest Financial Group. This is our investment team’s mid-week release when we examine a news item, headline, or story making the rounds from publicly available sources and ask, “Is it News or Noise?”
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So here we go..
This week’s news or noise topic? The Federal Reserve and their monetary policies. Straight up front, viewers this is news for sure to your money.
I would say this is one of the topics the investment team at Oak Harvest has message to our clients more times since the Covid market bottom in late March of 2020 than any other. Why? Because, while some people want the Fed to take up other agendas such as climate change, or income inequality, by charter, the Federal Reserve’s job is first and foremost still, about two things. First its about money, its availability and its stability. and 2, it’s about employment numbers and job creation.
We have messaged for years now, it’s the Federal Reserve, their monetary policies, and their policy changes that matter more to your money than politicians, elections, or weekly covid statistics and weekly government economic data. We have been messaging since early November of last year that we expected the first half of 2022 to be one of much higher realized volatility in the markets largely due to forthcoming changes in Federal reserve policies in 2022. Well sure enough, for the first two weeks of 2022 we have been flooded, almost daily, by Federal Reserve members discussing upcoming policy shifts throughout the coming year in order to combat the cyclical rise in inflation we have seen the last 12-15 months that is largely due to 3 factors.
Those 3 factors are 1 – the Feds own aggressive, overly easy, monetary policies they put in place to offset the Covid induced economic shutdowns in the first half of 2020. Two, the on-going supply chain disruptions due to or world being increasingly connected causing goods and materials inflation during Covid induced disruptions. Folks, luckily, these disruptions have peaked in our work. And third and finally, the current labor market shortage, which is being driven by a combination of 3 factors. First, is the last wave of the youngest baby boomers leaving the work force. Secondly is the oldest Gen X’rs (that’s my group) taking early retirements at historically high rates on the back of their overall wealth levels being at all -time highs. And 3rd and finally, many more retail and service-oriented jobs that are usually filled by younger, less educated workers are being left unfilled due to continued Covid related illness.
This final supply demand imbalance in the labor force is good news for workers, but it does raise the likelihood that future inflation levels settle down at higher levels than the Fed’s normal 2% long term goal. My personal guess is that in 15 to 18 months, when the dust settles, our economy is sitting at an inflation rate closer to 3% than 2%. Because of this, the Fed is looking at 1- stopping their bond asset purchases earlier. That’s halting the current QE purchases of both Treasury and mortgage bonds. 2- Beginning the process of raising short term interest rates earlier than expected. Recall viewers, the Fed largely controls short term rates, while market prices tend to drive longer term interest rates. And 3rd and probably most importantly, determining when and how they will begin to shrink their own $8.7 trillion balance sheet.
Our team has discussed and shared our analysis of the Fed Balance sheet with our clients for 2 years now. Next week I will get into some deeper analysis of this balance sheet topic, but for now lets just label all these things around the Fed as “news for your investments” and it’s the main reason why the team at Oak Harvest has messaged that the first half of 2022 is likely to be a sloppy, choppy mess for the overall stock market. One need to Look no further to last week’s sell off in software technology names based on ZERO fundamental news, at the same time technology semiconductor stocks rose. However, post this period of digesting Federal Reserve policy changes, we do expect the overall markets to regain its footing and continue its bull market ways. But until then, the news you hear about the Federal Reserve, well it is investment newsworthy and will likely continue to cause tremors throughout the markets in the months ahead.
From the whole team at Oak Harvest, thank you for your support and trust throughout 2021, and we hope we can continue to be your partner and provide you with value added service in 2022.
And Viewers, feel free to give us a call here to speak to one of our advisors. Let us help you craft a financial plan that meets your retirement goals and needs first, and your greed’s second. Call us at (877) 896-0040 we are here to help you on your financial journey into and throughout your retirement years.
News or Noise: News
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