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Don't Fight the Fed: 3 Major Central Bank Themes to Watch for in 2023

Don’t fight the Fed” is one of the most widely quoted investment axioms in financial markets. The idea is simple: since the United States Federal Reserve controls economic cycles and long-term interest rates, investors should align their investment strategy with the central bank’s policies. In the years following the 2008 financial crisis, the Fed kept monetary policy highly accommodative to encourage spending and economic growth. These conditions were a boon to higher-risk assets like stocks, which recorded their most extended bull market in history. Now, the Fed finds itself unwinding a decade of stimulative policies to combat rising inflation, which peaked at 40-year highs in June 2022.

2023 is shaping up to be a challenging year for financial markets. Analysts at BlackRock have warned about a looming recession whose severity will depend on the Fed’s desire or ability to respond. But, for now, central bankers remain focused on their price stability mandate. If investors are hoping to avoid a fight with the Fed in 2023, here are three themes they should watch out for as the year progresses.

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The Upper End of the Federal Funds Rate

Acceptable Levels of Unemployment

Forward Guidance vs. Actual Financial Conditions

The Bottom Line