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Experts: Fed Rate Hike Delaying; Buy Defensive Dividend Stocks
Aspire, Hot Picks | 19 October 2015
By: Lim Si Jie
Articles (169) Profile

While Former Federal Reserve Chairman Ben Bernanke insists that The Fed has done no wrong in delaying rate hikes, Deutsche Bank’s chief US economist Joseph LaVorgna and strategist Komal Sri-Kumar believe that The Fed is now a follower of the market.

Ben Bernanke: No Rush to Increase Interest Rates

Ben Bernanke believes that there are no reasons why central bank policymakers should rush to increase interest rates.

Given that inflation is still low and full employment has only been achieved recently, Bernanke stated that inflation needs to get up to “at least two percent”. While The Fed previously promised not to tighten until unemployment rate reaches 6.5 percent, Bernanke stressed that the ultimate goal was still to raise inflation to two percent.

Deflation Dangerous to US Economy

Like most economists, Bernanke warns that low or no inflation has risks in the long term. If inflation is so low that it hovers near deflation, and given the already low levels of the Fed’s current interest rate, recession will follow with The Fed having no tricks up its sleeves anymore. Bernanke also acknowledged that the Fed does not have “terrific tools” to face a new economic downturn and that it might even require fiscal assistance.

Joseph LaVorgna: Investors Believe Fed Will Save Them

According to LaVorgna, one reason that stock markets continue to rally despite disappointing jobs report in September is because investors believe “The Fed has their backs”. However, the rally was actually a sign of tremendous instability in the equity markets—the jump was not due to the market hitting a low; rather, it reflected the market’s speculation that the Fed will step in and save investors.

LaVorgna believes that central bankers are essentially stuck given that investors are expecting the Fed to keep its benchmark federal funds interest rate near zero in the face of weaker labour market data.

Sri-Kumar: Fed Is Now a Market Follower, Rather Than Leader

The same concern was also voiced by Sri-Kumar, president of Sri-Kumar Global Strategies. He thinks that the Fed will not raise interest rates any time soon because it has fallen into the trap of following the market, rather than leading it.

LaVorgna has called the Fed “naïve to believe that it could actually raise rates if the market is not discounting it”. Sri- Kumar believes that if The Fed does go about increasing rates in December, it is going to be a major shock because all the people positioned in fixed income and equity markets will have to reverse their positions.

Investors Takeaway: Buy Dividend Yielding Stocks to Replace Bond Coupons

David Lebovitz, JP Morgan Global Market Strategist Vice President, believes that easy monetary policy would continue to be supportive of defensive sectors, which include utilities, health care and REITs. These stocks issue dividends that can act as a substitute for low bond yields, and there are also potential capital gains as the stock market continues to be buoyed by cheap financing.

List of Recommended Stocks

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

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