Is The Federal Reserve Wearing Blinders?

Jan 29 2014, 10:51pm CST | by

At Chairman Bernanke’s last Federal Open Market Committee (FOMC) meeting, the FOMC decided to do the entirely predictable—continue to reduce the pace of asset purchases by $10 billion. The FOMC ignored (perhaps rightly) recent weak economic data and market volatility to continue its slowdown of asset purchases. Beginning in February, the Fed will purchase $65 billion in securities per month. Most likely, in March, it will cut that to $55 billion.

The FOMC did extend its reverse repurchase program, which otherwise would have expired today. This program allows the Fed to better influence the overnight repurchase rate. It’s an important tool for the Fed to influence conditions in the shadow banking system.

My only criticism of the Fed with doing what everyone (except me) thought they would is that it looks like the Fed is on a preset course. Rather than reacting to the data and perhaps having a policy that adjusts to financial conditions, it seems to be marching down a path with blinders. Perhaps that is preferable to reacting to the data. After all, it should convince people that the Fed will not overreact to any short-term noise in the data. For example, even if we get a temporary increase in inflation, it’s only reasonable to conclude that the Fed will not tighten policy sooner than it needs to.

The views expressed are as of 1-29-14 and are those of Chief Portfolio Strategist Brian Jacobsen, Ph.D., CFA, CFP®, and Wells Fargo Funds Management, LLC. The information and statistics in this report have been obtained from sources we believe to be reliable but are not guaranteed by us to be accurate or complete. Any and all earnings, projections, and estimates assume certain conditions and industry developments, which are subject to change. The opinions stated are those of the author and are not intended to be used as investment advice. The views and any forward-looking statements are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or any mutual fund. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.

Wells Fargo Funds Management, LLC, a wholly owned subsidiary of Wells Fargo & Company, provides investment advisory and administrative services for Wells Fargo Advantage Funds®. Other affiliates of Wells Fargo & Company provide subadvisory and other services for the funds. The funds are distributed by Wells Fargo Funds Distributor, LLC, Member FINRA/SIPC, an affiliate of Wells Fargo & Company.                                           


Source: Forbes Business


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