September Newsletter – The Fiscal Elephant in a Monetary Room


AUG 28, 2020

The Federal Open Market Committee officially announced an update to its Statement on Longer-Run Goals and Monetary Policy Strategy. Most notably, the committee has officially adopted an average-inflation targeting framework, in which the committee will allow inflation (as measured by the core personal consumption deflator) to run moderately above 2% for a period of time following a period of inflation persistently falling below 2%. While many participants had been expecting some commentary from Chairman Powell on the status of the committee’s policy review, few expected a formal announcement would be made this soon, given the July minutes suggested committee members were still some time away from finalizing their review.

For investors, there are some key takeaways. First, the announcement provides an update to the Fed’s framework, we still expect this enhanced forward guidance to lead to further outcome-based forward guidance by the end of the year. This will allow the committee to further clarify the time horizon over which it seeks to achieve an average 2% inflation rate, the upper-bound range or level the FOMC is comfortable inflation running when above 2%, and the pace and size of interest rate hikes associated at and above these levels.

Second, the committee no longer views inflation as a symmetric target and clearly sees greater risks to low inflation, rather than higher inflation. In fact, the committee removed the language around its inflation target being symmetric altogether, further acknowledging that super easy monetary policy through most of the pre-COVID expansion frustratingly did not lead to higher inflation.

Third, the Fed, to a certain extent, is running out of options. While the policy shift is welcome, it casts a bright light on the difficult macroeconomic environment the FOMC is dealing with. It is clear that prolonged periods of near-zero interest rates and aggressive quantitative easing alone are not enough in achieving 2% inflation, let alone inflation above that level. With this in mind, the Fed can only really lean on forward guidance, hoping to firm inflation expectations, while not causing financial market stress.

Lastly, it should be recognized that while the Federal Reserve conducts monetary policy independently, the real power of monetary policy, in 2020, is through debt monetization, not through low interest rates. Government stimulus that can effectively be financed through an interest free loan from the central bank encourages increased deficit spending and would likely generate the inflation the Fed is targeting. Of course, the Fed would never acknowledge this as it would erode its own independence and potentially weaken the perceived effectiveness of its own policy tools. Nonetheless, the two forces in tandem would be a powerful impetus for higher prices.

Elsewhere, the committee adjusted the language to its objective of maximum employment. The committee’s policy decisions will now be based on the assessment of the “shortfalls on employment from its maximum level” rather than deviations. The change in language suggests it recognizes that even a remarkable improvement in the labor market as experienced over the last expansion, may not generate much inflation. Moreover, monetary policy serves as a rather blunt instrument in influencing labor market conditions without fiscal measures also, another subtle acknowledgement for the need of government support in achieving its goal.

Overall, we think the Fed’s actions are a step in the right direction. The Fed has been extraordinarily proactive in their handling of monetary policy in the current environment and its announcement shows the committee continues to be forward thinking in their approach. There are still questions, however, if this approach will be successful in actually firming expected and realized inflation at 2% with its current toolkit.

For investors, while the announcement does provide further clarity on future Fed action, it does not suggest any changes are warranted in portfolios currently. Inflation is likely to rise, albeit gradually as the economy navigates a bumpy reopening process. Short term rates are likely to remain near zero well into 2021, while long yields should move gradually higher as growth stabilizes. With that said, as equites continue to reach all-time highs on shaky fundamentals, some degree of protection should still be in place.


Estate Planning In The Age Of Covid


The rapid escalation of the coronavirus pandemic has motivated clients to finalize their estate planning documents with their attorney, accountants and financial advisor team all working from home.

With mortality at the forefront of everyone’s mind, clients who have been holding off on estate planning are now prompted to quickly finalize their estate plan so that they will have something in place should illness or death befall them. Without an estate plan in place, clients will be reliant on state laws and probate courts to appoint individuals who will be responsible for financial affairs and health-care decisions in the case of illness and ultimately the transfer of assets upon death. We recommend that our clients review their estate planning documents, including wills and trusts and their gifting techniques, to determine that they are in line with their goals and the tax law changes. The review of estate planning documents is particularly important during these unprecedented and unpredictable times.

Here is a list of documents you should have updated:

  1. Power of Attorney—A power of attorney is a legal document that gives an agent the authority to carry on a person’s financial affairs and protect their property by acting on their behalf when someone is incapacitated. The power of attorney gives the agent the ability to pay bills, write checks, make deposits, sell or purchase assets, and sign tax returns.

Any competent adult can serve as your agent; however, it should be someone you trust to be honest, who exhibits common sense and who acts responsibly.  Choose someone who is relatively nearby to manage the particular aspects of handling your finances. You should also choose a back-up agent in case your primary agent becomes unavailable.

Without a power of attorney in place, there is no person legally authorized to act on your behalf, and family members will be required to request the probate court to appoint a guardian to take over these duties. The court process may be very time consuming especially during a pandemic.

  1. Health-Care Proxy—Similar to a power of attorney, a health-care proxy is a legal document that gives an agent the authority to make health-care decisions on your behalf if you are incompetent or incapacitated. If you are over the age of 18 and don’t have a health-care proxy appointed, your family members will have to request that the probate court appoint a guardian to make these important health-care decisions.
  2. Last Will And Testament—A last will and testament is a legal document that allows you to direct distributions of your property at the time of your death. A will also allows you to appoint an executor who oversees the distribution of your assets. Everyone has assets that must transfer after a person’s death. Without a will, there is no direction as to how those assets will pass; distribution of your assets will be handled by the state and the court will decide on the best person to oversee the administration of your estate. A will also allows you to appoint a guardian to take care of minor children. Again, if you don’t have a will, a court will decide on the best person to fulfill this role.


Did You Know:


– 68% of 842 small business owners surveyed in May 2020 are “very” or “moderately” concerned about their increased exposure to getting sued as they reopen their businesses (source: National Federation of Independent Business Research Center).


– There have been 6 bear markets in which the S&P 500 has suffered at least a 30% decline in the last 75 years (1945-2020), the latest being a 34% tumble ending 3/23/20.  In each case, the stock market eventually recovered 100% of the loss sustained, i.e., it closed above the previous bull market high.  The average time the S&P 500 took to recover back to a new record price after the first 5 bears was 43 months, compared to just a 5 month bounce back needed after the 3/23/20 bear market low (source: BTN Research).      



Peace I leave with you; my peace I give to you. Not as the world gives do I give to you. Let not your hearts be troubled, neither let them be afraid. – John 14:27

“The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.” -Benjamin Graham

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