The world’s largest wealth manager says central banks still have plenty of ammo that can keep stocks rallying


Federal Reserve


  • Investors who think central banks are out of policy ammunition are mistaken and could lose out on additional policy-driven gains, says Mark Haefele, chief investment officer at UBS Wealth Management.
  • The Federal Reserve has slowed its roll after rapidly deploying unprecedented relief measures, and is expected to stay its course during this week’s Federal Open Market Committee meeting.
  • Still, the central bank can push more accommodative conditions through its new inflation target, larger asset purchases, and by keeping rates near zero for longer, Haefele said.
  • Investors should ditch cash and the safest bonds for stocks and higher-yielding assets if the Fed takes any new easing actions, the wealth manager added.
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The Federal Reserve is expected to stay its course at this week’s Federal Open Market Committee meeting. But investors shouldn’t underestimate how much more the bank can do, says Mark Haefele, chief investment officer at UBS Wealth Management, which oversees $1.4 trillion in assets.

Central banks in the US, Japan, the UK, Taiwan, and Indonesia are holding policy meetings this week to determine how to keep economic recoveries on track. Many fear the historically low rates in place across major economies leave monetary authorities with fewer tools should additional easing be necessary.

Haefele holds an opposing view, and advised clients in a Tuesday note to position for years of accommodative policy.

“Central banks are far from out of ammunition, in our view. The prospect of rates staying lower for longer presents both a challenge and an opportunity for investors,” he wrote.

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Fed policymakers have already indicated rates will stay near zero through 2022. Markets expect the low-rate environment to last as far out as 2025 to ensure the economy fully rebounds from its coronavirus slump. Cash and the most stable bonds “are likely to deliver negative real returns for the foreseeable future,” Haefele said.

Investors holding such assets should pivot to stocks and higher-yielding assets to capitalize on other monetary relief efforts, he added.

One such support comes from the Fed’s quantitative easing programs. The central bank’s balance sheet has more than doubled in 2020, and the Fed can still accelerate its purchase pace or shift to longer-dated securities to bolster the economy.

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The Fed’s updated policy framework also leaves from for additional easing. The central bank announced in late August that it would replace its 2% inflation target with a broader goal of reaching an average 2% rate over time.

The shift allows for period of higher-than-usual inflation to balance out periods of stagnant price growth. Policymakers could introduce tools such as forward guidance and yield-curve control to gain greater control over rates.

In all, investors should prepare for additional central bank aid even after its unprecedented efforts, Haefele said. Pressure for further easing has intensified through the month as Congress remains deadlocked in stimulus negotiations. If legislators aren’t able to pass their own relief measure, the Fed may need to step back in to maintain the nation’s rebound.

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