In case you haven’t heard yet, Federal Reserve Open Market Committee kept the Federal Funds rate at a target of 0 to 0.25%.  This was the most anticipated Fed decision in modern memory, in no small part because the Fed Funds Rate has been near zero for nearly seven years. It’s also relevant because the Fed’s “dual mandate” of promoting full employment and maintaining price stability appears to be very nearly met.  The Fed is more focused now on the impact of slowing of key international markets on U.S. prices than it has in times past.


It’s not that the Fed’s view of global economic growth isn’t worth understanding, or that the employment picture is hum-drum. We just don’t think that the Fed’s short-run decision to raise now, or in October, or even next year, will have a material impact on our clients’ investment strategies or much of anything else, really.

For example, the low interest rate environment has meant that fixed income investors – especially individuals holding bank certificates of deposit – have been deprived of yield. The same is true for banks and insurance companies with high bond requirements for their portfolios. Peloton sticks with our target asset allocation levels for each client account, which means that sometimes we have to hold our noses when selling stocks and buying bonds. But the stock side of our allocation includes everything from new companies that pay no dividends to convertible preferred stocks that yield greater than 6%, giving us significant control over income from equities. Also, while sticking to the spirit of asset allocation, we’re not bound by it, and exercise limted judgement about how much and when we let precise allocations drift from the goal. We might let stock allocations drift 5% or 10% above target, if those stocks are providing the portfolio with needed income. The point here is that Peloton is able to work around low bond yields, accomplishing key portfolio goals of income and growth with low interest rates.


Fed Funds 10Y

Another thing the Fed’s lack of action doesn’t mean is that the U.S. economy is poised for recession or deflation, or that stocks are going to decline. In her remarks, Fed Chair Janet Yellen acknowledged the role that low energy prices and the resulting drop in imports had on the Committee’s decision to keep rates static. The price of oil is particularly volatile and temporarily low in our view. The Fed sees oil rising next year, dragging our very modest inflation slightly higher in 2016. We view the low price of oil as a profit margin enhancer for companies operating in a host of industries. And consumers have also begun to enjoy the effects of gasoline priced under $2.00 in some locations.

We do believe that the Fed should normalize interest rates sooner rather than later, but that has more to do with removing impediments to certain industries which are dependent on bond yields, like banks and insurance companies. Even some banks, though, have been discussing the possibility of raising rates well in advance of the Fed’s first move because their markets can bear the change. Sure, a sudden large increase in the Fed Funds Rate would produce a shock, but that isn’t anywhere on the radar.

In our view, the economy isn’t like a spider web, where the Fed sends shivers throughout the entirety of U.S. public and private investment decisions by delicately plucking a single remote strand of silk. It’s more like a connected and resilient network of reasonably rational decision makers. The economy is more than the government and its actions: it’s innovators and renovators; it’s penny-pinching savers and big-spenders; it’s long-term investment and short-term outlays; it’s all of us, going about our productive endeavors.  Because of that, we expect that the Fed’s decision today will have little ultimate impact on any of us.