A sign of certainty has surfaced from Washington, D.C., with the nomination by President Obama of Janet Yellen to be the next Chair of the Federal Reserve (Fed). The President’s nomination requires confirmation by the Senate, with those hearings scheduled to begin this week. Given the current political challenges in Washington, the confirmation process will more than likely not be “normal,” but we do expect Ms. Yellen to be confirmed as the next Chair of the Federal Reserve.
This announcement is important because it provides clarity on the future leadership of the Federal Reserve. As a result, investors can begin to focus on the monetary policies that will be implemented by the Fed and their implications for the financial markets.
Under new leadership, we believe the Fed will maintain its accommodative monetary policies including the current $85 billion per month asset purchase program. Specifically, the asset purchase program will continue at its current pace into 2014. If “tapering” of the asset purchase program begins sooner than we are projecting, that would imply the U.S. economic data is stronger than we’re expecting, which should be good for the stock market and less so for the bond market. In our opinion, market volatility created by the political impasse in Washington, combined with our expectation for continued weaker-than-expected U.S. economic growth, will cause the Fed to err on the side of too much stimulus for the time being.
Given our outlook for monetary policy, we believe interest rates will fluctuate in a relatively stable range over the near-term. We continue to think the long-term trend is towards higher interest rates given that under appropriate conditions the Fed has stated that it will begin to “taper” its asset purchase program. Global stock markets and alternative investments should maintain their long-term upward trend. In particular, emerging market equities should continue to benefit on a near-term basis, as a result of the Fed maintaining its current monetary policies.
Dennis A. Johnson, CFA Chief Investment Officer
Comerica Asset Management Group
The views expressed are those of the author at the time of writing and are subject to change without notice. Comerica does not assume any liability for losses that may result from the reliance by any person upon any such information or opinions. This material has been distributed for general educational/informational purposes only, and should not be considered as investment advice or a recommendation for any particular security, strategy or investment product, or as personalized investment advice.
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