Worried About The Fed Killing the Rally? Here Are Four ETFs That Should Rise Whether The Fed Tapers QE or Not

Is “Forward Guidance” Overvalued?

Whether the paper from the San Francisco Fed has any effect on Fed policy remains to be seen. But I think the conclusion that “forward guidance” is a more-effective policy tool than QE is incorrect, and I’m starting to get the impression that the academics at the Fed, and other central banks, are overvaluing “forward guidance.”

Last week, the Bank of England released “forward guidance” that said they would keep rates at or near 0% for the next several years.  The British pound reacted by doing exactly the opposite of what should happen—it rallied more than 1%.  The reason it rallied was because most investors think the BOE is too pessimistic on their economic projections, and that the economy will be doing much better over the coming years. At that point, the BOE would then have to abandon its “0% until 2016” policy stance or risk big inflation.

I think it’s the same thing with the Fed.  All of us have watched the Fed for a long time—and I can tell you their long-term forecasting abilities leave a lot to be desired.  So, beyond about 6 months or a year, I’m not sure how many people actually believe the Fed’s forecasts.  Does anyone think that, if the economy starts to accelerate and the 10-year yield moves through 3% and GDP growth accelerates, the Fed reiterating its promise to keep rates low until 2016 will have any legitimacy behind it?

I bring this up because if the Fed “tapers” QE and expects “forward guidance” to keep rates anchored, I think they risk letting the rise in interest rates accelerate, potentially significantly.  So, if this shift in policy focus does occur, I think it only strengthens the case for the inverse bond plays: the ProShares Short 20+ Year Treasury ETF (TBF), ProShares UltraShort 20+ Year Treasury ETF (TBT), iPath U.S. Treasury Steepener ETN (STPP) and ProShares Short High Yield ETF (SJB).