At Vanguard, senior economist Roger Aliaga-Diaz doesn’t believe any increase in rates is warranted this year.
“The Fed's decision to hold off on a rate increase is a clear indication to the markets that this rate cycle will be different, with international conditions and U.S. dollar strength weighing more on the decision than in the past,” Aliaga-Diaz said in a statement. “We are concerned with the Fed's acknowledgement of recent market volatility in its decision. The Fed runs the risk of being held captive to the markets, as, paradoxically, much of that volatility is due to the anticipation and uncertainty around when the Fed will move.”
Indeed, Siomades says the uncertainty surrounding the Fed’s decision-making could have a harmful effect on the markets.
“I despise the Super Bowl pre-game shows that start at noon on game day, but that’s what is going to happen here,” Siomades says. “It’s going to become a circus; everyone’s going to perceive the data differently. If more people think there’s a case for a Fed raise, then we’ll plan in advance and get locked in. We’re getting into a bad cycle.”
Wood believes that the Fed has intentionally increased the lead time before announcing changes in monetary policy.
“I think a lot of the volatility during the summer was associated with what would be the first rate hikes in almost a decade,” Wood says. “The Fed is now using forward guidance and their ability to effectively communicate to lay the groundwork for what will be a very long normalization process. They’re sending messages and gauging reactions before announcements are made. I remember Alan Greenspan and his briefcases. We’ve come a long way from waiting to see if he had the big briefcase or the small brief case.”
Advisors should warn their clients that volatility may increase, Siomades says.
“The Fed has already been tightening in some respects since it discontinued quantitative easing,” Siomades says. “This is an opportunity to sit down with clients, clearheaded, and discuss how this affects them. If they have a plan, and potentially moving 25 basis points in either direction makes a difference, it’s time to revisit the plan. It’s a good time to revisit anyway because advisors can assess their feelings about volatility. If they can’t stand the volatility, it’s time to do something different.”
Even advisors and clients who thrive in the active management environment should keep their eyes on the long term, DeLorenzo says.
“Advisors should tell clients that we know the direction, but not the timing,” DeLorenzo says. “Invest to meet your goals so you don’t have to react to all this noise.”