J.P. Morgan Strategist David Kelly Not a Big Fan of Fed Policy

Speaking at the Wealth Management 2013 conference in Boston on March 22, David Kelly, CFA, chief global strategist at J.P. Morgan Funds, said he has three problems with the current Federal Reserve policy of zero interest rates and quantitative easing.

“First, it’s not stimulating the economy,” he said, adding that he believes that recent strength in the US housing market and other economic indicators are not a result of Fed policy but a naturally occurring pent up demand after years of low activity. “My great fear is that people will look back and draw the wrong conclusions.”

Kelly’s second problem is that the every time the Fed meets and decides to maintain their policy, they are in effect talking down the economy. “A characteristic of recessions is that consumers and investors sit out, awaiting a period of more certainty,” Kelly said. By extending current policy indefinitely, the Fed undermines confidence in the market, encouraging investors and consumers to remain on the sidelines.

Kelly’s third problem is that current rates are too low to make lending profitable, so the Fed’s policy actually depresses lending rather than encourages it. He believes a modest increase in rates would actually help the economy, since a large proportion of consumer debt consists of low, fixed-rate mortgages, while investment income would rise with interest rates. He summarized his view by noting that “current rate policy is not pushing on a string, its strangling the economy with a rope.”

That’s not to say an increase would be good for bondholders. Kelly recommends investors underweight fixed-income, which he believes is “unrewarding and dangerous” at current levels.

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