In the global wide search for yield, U.S. stocks are still attractive . .
The Federal Reserve’s two officials did their best Friday to convince investors interest rates will likely rise by the end of the year, waking stock-market bears from hibernation. But the damage to equities is likely to be minimal once Wall Street regains its composure. Chair Janet Yellen raised the possibility that future policy makers might increase their inflation target and broaden the types of assets they can buy to enhance their ability to counteract a severe recession.
“In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal-funds rate has strengthened in recent months,” monetary policy makers currently have sufficient tools to handle economic downturns “under most conditions.” Those tools include asset purchases and so-called forward guidance in which the central bank promises to keep interest rates low.
– said Yellen.
A major factor behind the need for a potential rethink: the low level of the neutral interest rate, the short-term rate which neither stokes nor slows economic growth. Some calculations indicate that it’s now close to zero in inflation-adjusted terms. It could remain at this low level if we were to continue to see slow productivity growth and high global saving. .
“Even as Yellen sounded bullish on the economy, data point to soft patches. The gross domestic product grew 1.1% in the second quarter. Investors should stop looking at every word that comes out of the Fed,”A September rate hike won’t happen, regardless of what anyone says. .
– said Karyn Cavanaugh strategist at Voya Investment Management.
In carrying out monetary policy, the Fed currently can buy U.S. Treasury debt and securities issued or guaranteed by government-sponsored agencies. Other central banks are less constrained. The European Central Bank earlier this year began buying corporate bonds, while the Bank of Japan purchases a variety of assets, including exchange-traded equity funds.
Future policy makers might choose to consider some additional tools that have been employed by other central banks, though adding them to our toolkit would require a very careful weighing of costs and benefits and, in some cases, could require legislation.
Finally, and most ambitiously, as a society we should explore ways to raise productivity growth. Though outside the narrow field of monetary policy, many possibilities in this arena are worth considering, including improvements in education and worker training, more investment in research and reduced regulatory burdens..
J. Mason ♦