The Federal Reserve (Fed)’s no-taper announcement was certainly a surprise. I had expected a ‘taper lite’ rather than a hold.
Still, the announcement is consistent with my expectation that the US recovery will remain slow and that interest rates are likely to finish the year around where they are now. By failing to taper, the Fed signalled to the market that there are still lingering questions regarding the strength of the US recovery. Of particular concern is the resilience of the housing recovery in the face of rising interest rates.
What does this mean for investors? As I write in my latest weekly commentary, the Fed’s decision confirms some of my asset allocation views and tempers others. In particular, there are four asset allocation implications of the Fed news:
1.) Rate-sensitive assets may get a temporary reprieve after the Fed news, but I remain underweight two such asset classes: global utility stocks and gold. While I recognize that softness in these assets may be delayed because real interest rates will not rise as quickly as investors had feared, I still expect real rates to rise over the longer term.
2.) I remain overweight equities versus bonds. A slower taper suggests easier monetary policy for longer, a development which is consistent with our overweight view of global equities.