Institutional Investor | Fed Watchers Can Take a Break, Manager Says

By December 14, 2016In The News

Highland’s Mark Okada says investors should stop obsessing over the Fed’s every move, as other factors are now coming into play.

In the unprecedented market environment of recent years, central banks and interest-rate policies have played an outsize role in determining market conditions, and Fed watching has turned from a wonky preoccupation of traders and policy geeks to an all-out national obsession. Federal Reserve board members have transformed from (mostly) little-known technocrats to minor celebrities — at least in the finance world — while Federal Reserve Chair Janet Yellen’s every utterance has been thoroughly scrutinized and Fed meeting minutes have been pored over as if they are the Dead Sea Scrolls.

Finally, some of the obsessives can exhale: As was widely expected, the Fed announced on Wednesday it is raising its benchmark interest rate by a quarter of a basis point, to between 0.50 percent and 0.75 percent, the first rate hike in a year and only the second in eight years. The Fed also said it expects to rase short-term rates a further 0.75 percent in 2017, likely with three separate hikes. Stocks see-sawed on the news with the Dow Jones Industrial Average initially rallying and coming close to hitting 20,000 before falling, only to rise again.

But at least one fund manager thinks fervent Fed-watching is somewhat pointless. Speaking at a 2017 outlook briefing in New York, Mark Okada, CIO of $15.4 billion, credit-focused firm Highland Capital Management, said that the current political, regulatory, and economic environment means that investors can more or less forget about what the Federal Reserve does for a bit as other factors start to take precedence. Okada, who believes that the Fed will not drastically raise rates any time soon, said that maybe the Fed “doesn’t matter for a bit.”

Okada, who spoke at the briefing the day before the rate hike was announced, said that even if there Fed were to raise rates on Wednesday, it would do little to change the overall picture. With the effects of quantitative easing coming to an end, Okada anticipates a shift from monetary to fiscal policy. “This monetary experiment we have had in the past eight years is running out of steam,” he said.

For its part, the committee explained its rationale for raising rates in a statement.

“Information received since the Federal Open Market Committee met in November indicates that the labor market has continued to strengthen and that economic activity has been expanding at a moderate pace since mid-year,” the committee said in the statement. “Job gains have been solid in recent months and the unemployment rate has declined. Household spending has been rising moderately but business fixed investment has remained soft. Inflation has increased since earlier this year but is still below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports.”

Okada thinks that in any case, government policy and regulation will likely have more of an effect on markets and assets going forward, with the Fed taking its queues from what happens around it.

In other words: Don’t fight the Fed, but it may be time to forget Yellen and Co. — at least for the time being.

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