Guggenheim's Minerd Says Fed Making Economy More Vulnerable

(Bloomberg) -- The Federal Reserve’s U-turn on policy is stoking systemic vulnerabilities in the U.S. economy and now is a prudent time for investors to take profits, according to Guggenheim Partners’ Scott Minerd.

A surprise move by the central bank to forecast no change to interest rates for the remainder of this year will increase the excesses in corporate America, which is already highly leveraged, and expose the economy to a higher chance of future shocks, he told Bloomberg TV.

“It seems like they have basically returned the punch bowl and they are encouraging everybody to have a drink,” Minerd, the firm’s chief investment officer, said. “They have swung a little bit too far.”

Minerd said in late December, as the market plumbed lows, that the flattening of the yield curve was a signal that U.S. monetary policy was “too restrictive and that we don’t have enough reserves in the system to stimulate the economy.” Just a couple weeks later Fed Chairman Jerome Powell raised the possibility of a pause in the Fed’s rate-hike campaign -- and at their January meeting, policy makers signaled rates were on a prolonged pause.

Minerd said that the Fed’s decision Wednesday doesn’t bode well for risk assets that will suffer even if the central bank is correct that inflationary pressures will build, as corporate profit margins would get hit. Stock investors showed they weren’t so sure either, as an initial rally fizzled and the S&P 500 Index ended the day lower. A weaker dollar did little to boost equities in Asia, which put in a mixed performance Thursday amid a Japan holiday.

“Inevitably, we are late in the cycle and a recession looms out there somewhere,” he said. “We can all argue about when, but it is coming, and you’ve had a really good move since 2009 -- it’s not a bad time to take some profits.”

To contact the reporters on this story: Adam Haigh in Sydney at ahaigh1@bloomberg.net;Scarlet Fu in New York at scarfu@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Joanna Ossinger, Andreea Papuc

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