Equity markets are off their highs on worries that the Federal Reserve will soon start tapering its quantitative easing, but three well-known fund managers say the Fed’s not going to shift gears anytime soon.
The Fed has given guidance on what it will take to end the stimulus, says James Montier, a member of Jeremy Grantham’s asset allocation team at GMO LLC. Those guideposts are 6 percent unemployment and 2.5 percent inflation.
“Unemployment is at 7.5 percent and inflation is at one. We are miles away,” Montier says.
Richard Bernstein, chief executive officer of Richard Bernstein Advisors, a subadvisor of Eaton Vance Management, says investors need to put the Fed’s action in a longer-term context.
“There have always been times when there [have] been some concerns about changes in Fed policy and whether the fundamentals are strong enough to handle the changes in policy. It’s a normal occurrence. It’s a bit of a bigger issue because the Fed has been more involved,” Bernstein says.
Montier and Bernstein spoke today on a panel at the Morningstar Investment Conference in Chicago.
Montier marveled at just how fast the market changed its perception toward the Fed’s quantitative easing program.
“We’ve seen a huge shift in the market since last year. [It has gone] from pricing in a period of financial repression lasting 25 years … to not only tapering [stimulus] but thinking they’re going on a tightening cycle,” Montier says.
The Fed could always change its mind, Montier notes, but he doesn’t expect any tapering soon.
Bernstein says the Fed is not a leader, but actually lags behind economic conditions when finally making the decision to change monetary policy. In its research, Bernstein Advisors has had a “hard time” finding many examples of the Fed reacting early to economic conditions.