Investors shouldn't lose patience with the Federal Reserve just because monetary-policy committee decided to remove the word "patient" to describe its timetable for raising interest rates.
The word choice means the Fed could hike rates as early as June, for the first time in nine years. Yet the Fed would be unlikely to abandon its "patience," or tighten monetary policy, if there was a significant risk that it would undermine the stability of markets or compromise the resiliency of the economy.
The U.S. economy is strong enough to withstand a rate increase. Its growth remains robust — we expect it to be 3 percent of GDP in 2015. It has generated more than 200,000 nonfarm payroll jobs every month for about a year. Individuals' financial prospects have improved. On average, companies are flush with cash and can handle extra borrowing costs. Higher rates should help strengthen the U.S. dollar and make U.S. exports more expensive and less attractive. But exports make up only 13.6 percent of U.S. GDP. Overall, the downside of a Fed rate hike against a robust recovery is low.
From an economic perspective, monetary tightening also has an upside. Increased competition for labor may eventually lead to pay rises and wage inflation. Particularly if the oil price bounces back off its lows, this may ultimately risk stoking inflation overall. Although urban prices declined 0.7 percent in January, the Fed is "reasonably confident" that in the medium term, inflation will rebound towards its 2-percent goal. Tighter Fed policy may help guard against an eventual overshoot, as well as other problems such as excess lending, borrowing, under-saving, or over-spending, and economic overheating in general.
For U.S. companies, this environment is supportive. The Fed is trying to ensure the economy remains on an even keel without any dramatic costs to U.S. firms and the detriment that would result. Nevertheless, some U.S. multinationals with strong overseas earnings may see the value of those earnings fall in U.S. dollar terms. Some technology, consumer staples, and airline names have raised concerns over US dollar strength. But this is not representative of the corporate sector as a whole.
The one broad area that has suffered from tighter U.S. monetary policy and a stronger U.S. dollar is emerging markets. These are likely to find their U.S. dollar borrowings more difficult to service if U.S. interest rates are rising and the U.S. dollar is becoming more expensive in terms of their local currencies. Combined with slowing growth in the developing world and falling commodity prices, this has created significant headwinds for emerging economies. Although countries like India have embarked on reforms to improve their resilience, this may not be enough in all cases.
Overall, the Fed's language today shouldn't panic investors. The Fed has signaled that it will probably tighten monetary policy for some time, and that it has taken into account economic fragilities when considering when to raise rates. The Fed is also focused on ensuring it doesn't choke off the US recovery, especially as the US is now such a key component of global growth. Investors should take heart from the Fed's accommodative stance and should avoid making any hasty changes to their portfolios.
Commentary by Mike Ryan, the chief investment strategist at UBS Wealth Management Americas. Follow UBS on Twitter @UBSamericas.