Bernanke’s September Surprise

Last Thursday Ben Bernanke surprised investors by announcing the Fed was going to indefinitely continue its efforts to stimulate economic growth. It has been doing this by buying $85 billion per month of bonds and keeping long-term interest rates low. Earlier in the year, Bernanke, citing an improving economy, hinted that the Fed may taper the monthly bond purchases this fall, allowing long-term rates to rise. The stock market rose on the announcement.

The financial crisis, now five years old, resulted in an unprecedented amount of stimulus. It was akin to using the strongest steroids and antibiotics to fight a very rare infection. The Fed’s job is to determine how much medicine will cure the infection, without overdosing the patient. It measures the health of the economy by monitoring inflation and unemployment. The Fed would like to see a moderate amount of inflation. Economics 101 teaches that a large monetary stimulus like this would cause high inflation in an otherwise healthy economy. While there have been pockets of high inflation, the overall numbers have been quite tame. The unemployment rate has trended lower; however, much of this is due to people who have simply stopped looking for work. Overall, Bernanke’s message on Thursday was that things are still getting better; however we’re not quite ready to taper.

Since the Fed first discussed tapering the stimulus back in May, investors have been trying to guess when it would start and how much would be done. Interest rates rose over the summer in anticipation of tapering beginning this fall. Large bets were placed by many investors. There was outrage on Thursday by portfolio managers who were positioned for a rate hike and got burned by the delay. Sigma’s strategy has always been to maintain a long-term outlook using diversified portfolios of various asset classes custom tailored for each client. We don’t believe that making very large bets on the short-term direction of interest rates, stocks, or any investment is in our clients’ best interests. Trying to time the Fed’s policy, or any government policy, is not a good long-term investing strategy.

Marisa A. Lenhard, CFA, CFP®