Slow Economy 3 Fed 0


Slow Economy 3 Fed 0

Weekly CEO Commentary 9-23-2013

Tim Phillips, CEO—Phillips & Company


This week the Fed blinked and decided to continue their purchase of 85 billion in mortgage and treasury bonds as part of their non-traditional monetary policy (QE3).

The Fed's statement accompanying their decision was one that I did not consider that negative. You can see the full statement here.

Here is the essence of their decision:

"Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases." [i]

The bottom line is that the Fed sees the economy functioning just fine except for the Federal Government’s spending cuts.

The immediate reaction from many investors was one of relief. However, upon further reflection the news may not be all that good.

One piece of data did get widely ignored by the main stream media when the Fed made their announcement. The Fed also released their quarterly economic growth outlook and, once again, they guided down economic growth for the US.

The Fed is now projecting a change in 2013 real GDP between 1.8% and 2.4%, down from 2.0% to 2.6% in June. For 2014, the Fed is now predicting GDP growth of 2.2% to 3.3%, down from 2.2% to 3.6% in June. [ii]

The Fed is notoriously overoptimistic at predicting economic growth, notwithstanding the over 500 economists (employed or on contract) that work for the Fed. Just take a look at the table below to see how positively biased the Fed can be. You can see they continuously revise downward their economic expectations. [iii]

FOMC economic projections

What can be more troubling is the simple fact that since 2011 the Fed's belief in their ability to stimulate the economy continues to disappoint their own projections. It's been nothing but a downward spiral of disappointment for the minds working at the Fed. [iv]

central tendency of projections from Fed

While some might be rejoicing at continued lower rates, what should worry them is the underlying fundamentals of a sustainable economy do not rest in near zero interest rate policy.

At some point the economy is going to have to expand at a much higher growth rate while facing higher interest rates.

As for our allocations, we continue to tilt toward a slower growth economy: Shorter duration bonds, fundamentally solid companies with lower debt ratios, emerging markets, and some small tilts toward technology and industrials.

If you have questions or comments, please let us know as we always appreciate your feedback. You can get in touch with us via Twitter, Facebook, or you can email me directly. For additional information on this, please visit our website.

Tim Phillips, CEO – Phillips & Company
Alex Cook, Investment Analyst – Phillips & Company

[i] “Press Release”, Federal Reserve,

[ii] “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, September 2013”, Federal Reserve,

[iii] “Fed’s Economic Projections – Myth Vs. Reality (Sep 2013)”, STA Wealth Management,

[iv] “The Fed’s About-Face”, Guggenheim Partners,