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J.P. Morgan’s Kelly, FAs Weigh in on Potential Rate Hike

By Grace Williams September 27, 2018

The Federal Reserve Board will meet Wednesday with an eye to setting monetary policy for the near future. The midday announcement will shed light on the way forward for advisors and investors, according to Dr. David Kelly, Chief Global Strategist and Head of the Global Market Insights of J.P. Morgan Asset Management. In an exclusive conversation with Financial Advisor IQ, Kelly laid out key themes and provided suggestions for advisors to consider.

At its last meeting in June, the Fed warned of an increase in rates starting this month, and Kelly believes rates will go up (as expected) by 25 basis points for each of the next four meetings. This will take the federal funds rate up to a range of 2 3/4 % to 3%. Notably, Kelly says, the Fed thinks this should be the range in the long run. But it won’t be without its impacts.

Ever the bull wrangler, Kelly believes the Fed is likely to begin its process of sobering up the market. “It’s the Fed’s traditional job to take away the punch bowl from the party getting out of hand,” he says. “And this [recent] tax cut is basically like bringing an extra keg to the frat party. You know it will make the party louder but it could cause a bigger hangover.”

Advisors are likely to encounter clients who are concerned about what lies ahead and how it plays into their investment strategies. The spotlight focused on Fed decisions, including the unusual political glare flashed by recent comments from President Donald Trump, does little to calm those nerves. Still, Kelly believes the Fed will continue to operate independently from the administration. Likewise, he says it will not seek to bolster the economy against the potential effects of a volatile trade policy.

“I suspect that just like they’ll ignore direct appeals to keep rates low to finance the budget deficit,” says Kelly. “Unless they genuinely think that trade tensions are going to put the U.S. economy into recession, they’re not going to allow the dampening effect of a trade war prevent them from raising rates.”

Kelly sees an evolving picture over the coming year.

“What will happen is as we head into next summer, it’s going to be clear the U.S. economy is slowing down again at least in terms of its growth rates. We can’t say there’s any huge risk of recession at this stage, but I think the economy certainly will be slowing down again,” says Kelly. “The Fed will realize that and then pause to make sure they don’t make the classic mistake of overtaking lanes, which is generally how the economy ends up in a soup.”

For Paul Ewing, an FT 400 ranked advisor and CEO of Prosperity Financial, fear and pessimism are not necessarily indicators of a coming bear market. In fact, they are quite the opposite. “Bear markets come out of optimism and over-optimism and we don’t have that right now,” he says.

Instead, highlighting the cautious approach and taking a mindful route with asset allocation has led the firm to change its international stock allocations from underweight to being at normal weight. “We are simply making sure that we are at weight relative to Vanguard and others,” he says.

At present, Kelly notes that there’s no need for advisors or clients to switch into panic mode or make drastic moves, but rather, it might be time to take stock and take notes.

In the spirit of being cautious, Brian Vendig, president of MJP Wealth Advisors, an FT 300 firm, has spent the past few months educating clients on risk and volatility. Over the year, he has allocated assets into the fixed income markets that have responded well to increased interest rates.

“Notes that are variable go up in value as interest rates go up,” Vendig says. “Active management in the fixed income space has provided more value than just buying indexes that are made up of bonds.”

Vendig also believes the economy will reach a point in the future where it makes sense to have a pause in global growth, and on Main Street or Wall Street. “We are being appropriate on where we’re reducing risk exposure,” he says. “We will keep a watchful eye over the next 12 to 24 months as a means to assess economic indicators and risk.”

On the flipside, Kelly says investors who do not act run the risk of ending up out of balance with their long-term appropriate portfolio related to markets moving in the same direction. “This is a time when people need to be very mindful that the movement in markets and valuations will tend to move them in one direction,” he says. “And they need to be actively thinking about rebalancing as interest rates rise.”