The Federal Reserve’s Open Market Committee is convening today and tomorrow, with “considerable time” at the forefront of their discussions. This phrase raises questions about its meaning and implications. What does it truly signify?
The origin of this discussion stems from months ago when Janet Yellen suggested that “considerable time” translates to six months. Consequently, if the Fed omits these words from its upcoming press release, many speculate it signals an impending increase in the federal funds rate—something that hasn’t happened in nearly six years, as rates have hovered near zero.
We await tomorrow’s announcement with interest, curious about the market’s reaction and the potential aftermath. At Economic Prism, we are particularly eager to see the end of the Zero Interest Rate Policy (ZIRP), which arguably should never have existed in the first place.
We believe that the Federal Reserve’s policies and the cheap money environment they foster have been more damaging than beneficial. The economy has become excessively reliant on ZIRP; removing it now could be as harsh as cutting off food stamps for a family in need.
This shift is likely to trigger negative consequences: defaults, stock market panics, and potential chaos in the derivatives market. Yet, amidst these challenges, we believe that confronting the reality of the situation is necessary.
Among the Skeptics
The financial system has been set up for a downfall, and we are deeply concerned. However, we prefer to confront these issues now rather than allowing them to deteriorate further. A perspective from Forbes captures these sentiments well; count us among the skeptics.
“Skeptics of the current stock market highs point to the role of cheap capital—unusually low interest rates from the US Federal Reserve, alongside a demand for an ever-shrinking supply of shares and extensive stock buybacks by public companies.
“As the Fed withdraws this free money, skeptics assert that normalcy will return abruptly, financial assets will reflect their true values, and caution is warranted.”
“On Wednesday, we may gain insight into when this moment of reckoning will arrive as the Federal Reserve releases its latest policy statement at 2 PM.”
“Traders and investors are eagerly anticipating whether the Fed will alter its long-standing commitment to maintain interest rates near zero for a ‘considerable time’ post its major bond-buying stimulus.”
What to Buy as the Great Unraveling Gets Underway
The stock market has experienced significant fluctuations in recent weeks, with the DOW dropping nearly 600 points in December alone. This may serve as a precursor to the conclusion of ZIRP.
Since the market’s low in March 2009, investors who bought the dips have generally been rewarded. However, those days may be fading. Now, selling during rallies might be a more prudent strategy to preserve capital.
What should investors consider purchasing as we navigate the beginnings of this unwinding? The yield on the 10-year Treasury Note has fallen to about 2.12 percent—it may go lower but not by much more than half a percent.
Gold remains a classic safe haven asset, often viewed as a safeguard against currency devaluation. While holding a portion of gold can be wise, it’s essential not to invest your entire savings solely into it unless you are firmly committed to it.
Interestingly, in the short term—over the next six months—as the Fed moves away from ZIRP, holding cash might not be such a bad option. As asset prices adjust downward, the value of cash increases, creating opportunities to invest when prices stabilize.
Maintaining a diverse investment portfolio across asset classes—stocks, bonds, cash, gold, and real estate—is crucial. Timing the market can be challenging, especially amid rampant fear. If asset prices plummet too quickly, the Federal Reserve might feel forced to take drastic, reckless actions.
Although the Fed may drop the term “considerable time” from its announcements, they may never actually raise the federal funds rate, opting instead to keep it near zero indefinitely. This could lead to new money generation from thin air to artificially inflate asset prices once again.
In this uncertain environment, anything could happen, and it’s likely that we could witness significant turmoil.
Best regards,
MN Gordon
for Economic Prism
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