The Federal Reserve last week indicated it will begin tapering its bond purchasing and quantitative easing policies, which had a distinct impact on the markets, according to the U.S. Bank The Private Client Reserve Market & Economic Update.
A lot of investors felt Fed Chairman Ben Bernanke’s comments about the potential for a fourth quarter beginning of the reductions may increase interest rates, said Joel Huffman, senior portfolio manager for The Private Client Reserve in Milwaukee.
But while the Fed is taking its foot off the accelerator, that doesn’t mean conditions are tightening, he cautioned. It is simply reducing the level of liquidity it pumps into the market.
Huffman expects increased volatility during the transition, and cautioned investors not to overreact and make portfolio changes.
Tracking unemployment data will be key, since the Fed uses those numbers as guidance on how quickly to ease up on QE, he said.
“There are a lot of cross undercurrents going on in the market,” Huffman said. “People need to be comfortable with what they’re doing, the strategy they have. If they’re comfortable, just keep a longer term perspective. We don’t think the recent announcement last week changes everything.”
Reduced quantitative easing is a good thing overall, since it means the economy is growing enough for the Fed to cut back, he said.
New housing starts were up about 12 percent year-over-year for April, corporate capital spending is expected to increase and manufacturing is growing slightly, all of which have driven modest economic growth that The Private Client Reserve expects to continue.