Quarterly Economic & Market Observations

In this quarterly installment of Economic and Market Observations, we go back to the future to explain the policy strategy of the Federal Reserve (Fed) and the likely outcomes we expect for activity and investment opportunities. We will discuss the current situation: • The Fed’s policy problem is simple and familiar. We believe Fed Chair Powell must restrain demand to put it in better alignment with supply, as his predecessors Volcker and Greenspan did in the prior century. • It is now unlike earlier this century—during the terms of Bernanke and Yellen, and in Powell’s first term—when Fed officials had to push demand up to supply as the zero lower bound to the nominal policy rate loomed. • In this new old world, we anticipate that the Fed will keep the real policy rate high and no longer act to support equity prices. This raises the natural real interest rate and term and equity premiums, reshaping the investing landscape. Data and events are driving the Fed’s policy guidance, as the central bank continues to monitor major developments. Please view the transcript under the attachments tab for important disclosures.