Chase economist: What’s changing about Fed strategy

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Federal Reserve Chair Janet Yellen‘s uber-dovish tone could signal a major shift in thinking for the U.S. central bank, Anthony Chan chief economist at Chase, said Thursday.

An emphasis on the global economy is leading the change, he said.

“When you are the largest economy in the world, or even the second-largest economy in the world, you have a responsibility to pursue strategies that are not only in the best interest of your own country but also in the best interest of the global economy,” Chan told CNBC’s “Worldwide Exchange.”

Yellen’s comments Wednesday afternoon signaled that four rates hikes are off the table. The Fed also lowered its target U.S. growth rate for this year and 2017, which gives the central bank room to breathe, Chan said.

“If growth is slowing down here, there’s no need to be as aggressive when it comes to interest rate hikes.”

International financial markets were a major part of Yellen’s remarks, although they are not part of the Fed’s dual mandate to maximize employment and stabilize prices. But Chan said the Fed is wise to factor in global markets.

“They have to watch anything that has a dramatic impact, or can have a potential impact, on the things they care about whether it’s growth or whether it’s employment,” he said.

One group that was not celebrating the reticence on rate hikes is banks. The sector dipped after the announcement, and S&P financials are down almost 7 percent year to date.

“The short-term move there was tough because these folks have been in the wilderness as far as their net interest margins are concerned,” Hans Olsen, global head of investment strategy at Stifel Wealth & Investment Management, said in the same interview. He is predicting one or two rate hikes in the back half of the year.

“The Fed will be forced into a catch-up mode,” Olsen said, citing strong employment and inflation data from a consumer perspective. “That will give the financial sector a bit of a break that they need.”

Currencies also moved on the Fed’s announcement. The dollar has been split against currencies this year but was altogether weaker, sitting near $1.13 against the euro. The Yen is also the strongest since October 2014 against the dollar.

Heading into 2016, the market was pricing in four rate hikes, Chan said. The reality of one or two could be a disruption to the dollar’s rally.

“That’s going to be good for earnings,” Chan said. “What you saw last year was that earnings were under downward pressure because of the stronger dollar with regard to multinational corporations.”

A weaker greenback is also good for battered-down energy prices, which Chan expects to go up with the downward currency move. Oil is one of the best-performing assets after a major sell-off earlier this year. Other “crisis assets” like gold are top performers, with the precious metal up more than 3 percent after the Fed’s announcement.

Earnings expectations in other parts of the U.S. market remain low. These market conditions, Olsen said, force investors to be much more tactical in their positioning

“If you look at the return spectrum this year, it’s been challenged at best,” Olsen said. “We’ll get some relief in the back half of the year when the comps get easier.”

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