Fed Independence, Interest Rate Cuts, and the Importance of Yield

The consensus heading into 2019 was that the Federal Reserve’s Open Market Committee would raise the federal funds rate three times this year. Instead, the benchmark lending rate was cut last month for the first time since 2008. Concerns over a global slowdown, trade wars, and yield curve inversion have given the Fed air cover to be “proactive.”

Reading between the lines, however, we find it hard to determine if the rate hike is consistent with the Fed’s mandate of price stability and maximum employment.

Rather, one cannot dismiss the current political pressures that threaten the Fed’s independence. To the point, we cannot overstate the magnitude of a recent op-ed in the Wall Street Journal signed by each of the living former Chairmen—Paul Volcker, Alan Greenspan, Ben Bernanke, and Janet Yellen—reiterating the importance of an independent Fed.

Fed Independence, Interest Rate Cuts, and the Importance of Yield

A legitimate concern is that we are seeing a repeat of President Nixon’s politicizing of the Fed that ultimately brought about the inflation bubble of the late 70s and 80s. It then took President Carter’s selection of a very aggressive Paul Volker to get inflation back under control.

Perhaps you are asking, what’s an investor to do in this type of environment?

When interest rates are low, one must remember the importance of yield and the role equities can play, especially now that 58% of S&P 500 issuers offer higher dividend yields than the current 10-year Treasury yield. Our Strategic Dividend Growth portfolio was re-engineered a few months ago with this core principle in mind. The strategy’s objective is to generate attractive risk-adjusted total returns with an emphasis on income generation via dividend-paying common equities.

As detailed in our June white paper, the enhancements to SDG centered around benchmark appropriateness, position weighting, and yield flexibility. We think that a domestic equity strategy with a yield focus can be an attractive asset allocation consideration, especially with little visibility on any alleviation to the rate backdrop. This, in turn, makes the recent SDG revamp timely for clients.

We also welcome the opportunity to discuss how to make sure your portfolio is positioned appropriately in this current environment.