Cramer's Charitable Trust: Fed Fears Economic Ripple Effects

 | Sep 17, 2015 | 5:15 PM EDT
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The following commentary was originally sent to Action Alerts PLUS subscribers on Sept. 17, 2015, at 4:44 p.m. ET.

In a largely expected move, the Federal Reserve announced this afternoon that it has decided to leave rates unchanged, citing the emergence of global headwinds that have the potential to temper economic growth, subdue inflation and amplify market volatility in the near term. Despite striking an incrementally cautious tone, Fed officials did keep alive the possibility of a rate hike before the end of the year.

While the Fed's economic outlook for the U.S. was largely unchanged on a stand-alone basis, it fears instability abroad may cause ripple effects, noting "recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term." Officials introduced a new phrase into the picture, adding it is now "monitoring developments abroad."

Concurrent with the rate decision, the Fed lowered its interest-rate forecast for the long run, a pivotal statement that implies the domestic economy is now less capable of withstanding monetary tightening amid external instability. The Fed's long-term forecast is now 30 basis points lower, to 3.5% from 3.8% in June. Policymakers are also forecasting a federal funds rate of 0.4% for 2015, 1.4% in 2016, 2.6% in 2017 and 3.4% in 2018, all of which are below previous expectations.

As a reminder, the Fed considers two data points when determining policy decisions: unemployment and inflation. With the Fed's forecast for the unemployment rate below its stated target of 5%, inflation remains the missing link. Policymakers now forecast inflation to creep only slowly toward the 2% target by 2018 even as unemployment continues to dip lower than previously expected.

The Fed appears mystified by the increasingly muddled economic picture, with low U.S. unemployment and steady economic growth overshadowed by disinflationary pressures and global volatility. This confusion has spread to the markets, with investors attempting to reconcile a dovish announcement with added uncertainty.

As it relates to our Action Alerts PLUS portfolio, we believe it is important to maintain a long-term view and avoid getting swept up by elevated volatility in the short term. We have raised a solid amount of dry powder that we plan on opportunistically deploying in our highest-quality positions as we see fit. Days like today reinforce the importance of holding a well-balanced, diversified and high-quality portfolio.

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