Is Fed tightrope leaning to hard fall?

The Chicago Tribune reports:

The problem is, it's almost impossible to know when enough turns into too much.

Investors should keep that difficulty in mind, some experts are cautioning, as the Federal Reserve strives to simultaneously foster economic growth and contain inflation. Because the Fed is by all accounts in the final phase of its cycle of raising interest rates, it may be time to consider a portfolio to guard against the Fed overshooting and causing a so-called hard landing, or recession.

"We believe the Fed is making its usual error: tightening too long and too far," David Wyss and Beth Ann Bovino of Standard & Poor's Corp. suggested in a recent report.

If their view proves correct--and many experts argue the Fed has indeed raised interest rates too high several times in the past--then the U.S. economy, which is widely regarded as facing a second-half growth slowdown, might instead plateau or even lurch downward for a time.

Historically, in the end-stage of a tightening cycle "the Fed has tended to overshoot" and raise rates too high, to the detriment of the economy and the stock market, observed Ed Clissold, senior global analyst at Ned Davis Research.

Ned Davis isn't forecasting an overshoot, although the Venice, Fla.-based research and advisory firm recently recommended investors adopt a more defensive posture by overvaluing cash and undervaluing stocks and bonds. Clissold noted that over the past several decades, stock markets have declined by a median of 4.9 percent in the six months after the Fed implements the final increase in a series of rate hikes.

In part, Fed policymakers often go too far because officials must rely on backward-looking data as they set future policy. But the risk may be higher than usual in the current circumstances, Clissold said, because Fed Chairman Ben Bernanke has only been on the job for a matter of months. In order to build up their credibility as tough inflation fighters, Clissold said, new Fed chairmen often tend to "tighten more than is necessary from an economic standpoint."

T-Bills yielding above 5% probably are going to outperform the stock market.