Give Ben Bernanke and the governors of the Federal Reserve Board credit. They saw the government shutdown — and the possible failure by Congress to raise the debt ceiling — and opted to postpone tapering until these issues are resolved.
The general consensus was the Fed would begin to reduce its stimulus efforts — tapering — in September and completely step away sometime in 2014. But the shutdown and the appointment of Janet Yellen to succeed Bernanke at the Fed in January put actions on pause.
Of course, the biggest concern about tapering is it will be the first step toward higher interest rates. A study by Allianz found 25 percent of institutional investors surveyed see rising interest rates as a “great risk” and 31 percent suggest it is a “considerable risk.”
However, if Yellen’s previous speeches are any guide, the likelihood of higher rates is slim. In a November speech to students at the University of California Berkeley, she said Fed policy involves “keeping the federal funds rate close to zero until early 2016,” and possibly through 2018.
Yellen will become chairwoman in January and serve a four-year term. She will be responsible for carrying out the dual mandate of job creation and controlled inflation, something Wall Street analyst Elaine Garzarelli believes will be possible.
“Yellen will likely be a dovish Fed chairman like Bernanke, and would likely proceed slowly and cautiously, but would not necessarily delay the start of tapering. We do not believe inflation will run higher than 2.0 percent during her tenure,” Garzarelli said.
For many investors, a low inflation/low interest rate environment leaves the door wide open to the financial markets, particularly stocks, to move higher, despite the fears generated by events in Washington.
“The stock market remains near all-time record highs and there has been no safe-haven rush toward Treasury bonds, the U.S. dollar or gold. Many suggest the lack of evident worry among investors should be worrisome, since this rather placid response smacks of complacency,” said James Paulsen, chief investment strategist at Well Capital Management.
“On several occasions since the 2008 crisis, we have suggested the country was suffering from ‘Armageddon hypochondria,’ an irrational fear of an imminent economic and financial market calamity. What is being widely confused as investor complacency is actually a stride toward rationality on the way back to financial market sanity,” Paulsen said.
The truth, probably, is somewhere between financial sanity and irrational fear. Since there is no way to be assured which way the markets will move and it’s certainly impossible to predict the actions of leaders in Washington, investors have to decide whether to stay or go.
“Just as stocks can’t go up forever, they also can’t go down forever,” said Randy Frederick of the Schwab Center for Financial Research. “Periods of heightened volatility come and go, but are generally relatively short-lived. If you don’t have a good feeling for where the markets are heading, sometimes just ignoring the noise and doing nothing isn’t a bad idea. Most important of all, remember that investing is a long-term endeavor, don’t let market volatility distract you from your long-term goals.”