Key Takeaways from the Fed Meeting 

 

 

1/29/2014 

The Fed’s latest step in unwinding its bond-buying program, while expected, has clear implications for investors, writes US Investment Strategist Kristina Hooper.
Kristina Hooper, US investment strategist and head of US Capital Markets Research & Strategy for Allianz Global Investors. She has a B.A. from Wellesley College, a J.D. from Pace Law and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.

In a move widely expected by the markets, the Federal Reserve decided to do another “tiny taper” today. That is, it pared its bond purchases by another $10 billion. There were no surprises—except that the FOMC vote was unanimous.


What It Means

The Fed believes that economic growth is improving, but fiscal policy continues to restrain economic growth. The FOMC sees upside risks increasing and more balanced with downside risks.
There was no mention of emerging markets or their currencies in the Fed’s announcement. Keep in mind that the Fed has a third mandate prescribed by the Dodd-Frank legislation: maintaining the stability of financial markets. So emerging markets may have been discussed. However, ultimately the Fed did not raise the fed funds target rate or even change its guidance, which would have had the most direct impact on emerging-market currencies.
The Fed likely felt comfortable with another small taper since markets were widely anticipating the move.


What’s Next

Looking ahead, the Fed will likely continue on its current trajectory of tapering. However, we can’t be certain for three reasons:

The Fed has promised its decisions will be data-driven and that it will continue to take a holistic approach to monitoring economic conditions.
Given its focus on maintaining financial stability, the Fed could change its tapering game plan at some point if it destabilizes emerging markets.
Don’t rule out the possibility that the Fed, at some point, changes the composition of the taper, focusing more on Treasuries—and less on mortgage-backed securities—in order to support the housing recovery, which is showing signs of stalling. Still, the Fed will likely remain highly accommodative, as it seeks to “stay behind the curve” and to support the economy’s growth.


Key Takeaways for Investors

1. We remain in an environment of financial repression. Investors with longer-term investment horizons will need exposure to risk assets in order to meet their goals.
2. Traditional income sources should remain scarce. With yields low relative to historical norms, investors need to be creative and move out on the risk spectrum to find higher yields.
3. Expect more volatility as tapering continues. Investors should look to dividend-paying stocks and lower-volatility strategies as ways to reduce the swings in their portfolios.




The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.

 
A Word About Risk: Investing involves risk and you can lose money. Equities have tended to be volatile and, unlike bonds, do not offer a fixed rate of return. Dividend-paying stocks are not guaranteed to continue to pay dividends. High-yield or “junk” bonds have lower credit ratings and involve a greater risk to principal. Foreign markets may be more volatile, less liquid, less transparent and subject to less oversight, and values may fluctuate with currency exchange rates; these risks may be greater in emerging markets. US government bonds and Treasury bills are guaranteed by the US government and, if held to maturity, offer a fixed rate of return and fixed principal value. Bond prices will normally decline as interest rates rise.
 

Allianz Global Investors Distributors LLC, 1633 Broadway, New York NY, 10019-7585, us.allianzgi.com, 1-800-926-4456.

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