U.S. equity markets started the year on a shaky note by falling some 10% through mid-February. Most of the selling pressure came from perceived weaknesses globally, which engendered heightened fear of a recession. In the end, the market recovered as negative views were supplanted in favor of more positive perspectives.
Nevertheless, in March, the Federal Reserve shifted to a more dovish tone indicating, fairly explicitly, the intent to slow the pace of rate hikes this year (edging away from the original plan).
Fed Succumbing to Short Term Volatility?
The Fed’s 25 basis point hike in December was consistent with the Fed’s long-term objective of normalizing interest rate policy; desired as the economy expands at a modest but acceptable pace and as labor markets improve. But, the Fed appears to have lost sight of the long-term objective by altering course on monetary policy; believed in response to stock market volatility and the accompanying negative headlines.
Bottom Line for Investors
While barely into the first couple of months of the tightening cycle, a reversal in the Fed’s monetary stance could be a sign of nervous governance. At Zacks Investment Management, we believe it is imperative, long-term, that the central bank remain focused on economic fundamentals and long-term goals versus short-term thinking relative to market volatility. Not only does this approach build credibility for the world’s most important central bank, it also allows markets to price-in future rate hikes with certainty – which could go a long way toward reducing volatility. Stay the course, Fed.
Disclosure