The Fed Decides to Wait

The Fed Decides to Wait

In a tough time for equities, it elects not to roil the markets.

The Fed Decides to Wait

On Thursday, the Federal Reserve postponed raising short-term interest rates. Citing “global economic and financial developments” that could “somewhat” impair economic progress and lessen inflation pressure, the Federal Open Market Committee voted 9-1 against a rate hike, with Richmond Fed President Jeffrey Lacker being the lone dissenter.1

This spring, a September rate hike seemed probable – but during this past week, assumptions grew that the central bank would put off tightening. On Wednesday, the futures market put the likelihood of a rate hike at less than 30%.2

The latest economic indicators did not suggest the time was right. The August Consumer Price Index retreated 0.1%, and the core CPI ticked up only 0.1%. In annualized terms, core CPI was up 1.8% through August while the Federal Reserve’s own core Personal Consumption Expenditures (PCE) price index was only up 1.2%. Retail sales advanced a mere 0.2% in August, 0.1% minus auto sales. Industrial production slipped 0.4% last month. The healthy labor market aside, none of this data was particularly compelling.3,4

Additionally, central banks have eased across the board the last few years. The Bank of Japan, the Reserve Bank of India, the People’s Bank of China, the Bank of Canada, the European Central Bank – none of them have begun tightening. Fed officials may have worried about the global impact had the FOMC elected to start a rate hike cycle.4

Some institutional investors hoped the Fed would tighten. Royal Bank of Scotland researcher Alberto Gallo recently surveyed 135 influential market participants and found that a majority wanted a September rate hike; 80% called for the Fed to make an upward move by the end of 2015. (Just 42% thought a September rate hike would occur, however.)2

That may seem like an odd viewpoint, but another response to the RBS survey helps to explain it: 63% of these institutional investors felt central banks had been too accommodative to equities markets, to the point where their credibility was slipping and exits from easy money policies appeared difficult.2

We may be witnessing a hawkish pause. The Fed uses a dot-plot chart to publish its forecast for the key interest rate, and the latest dot-plot projects the federal funds rate at 0.40% by the end of 2015. In other words, the Fed more or less told investors to get ready for a rate hike on either October 28 or December 16, the dates of its next two policy meetings.1,5

At the press conference following Thursday’s FOMC policy statement, Fed chair Janet Yellen acknowledged that a rate hike could happen in October. (She noted that if it did, the Fed would arrange a press conference following that FOMC meeting.) Yellen said that the central bank wanted “a little more confidence” that annualized core inflation would approach its 2% target before adjusting rates. She also commented that the recent global equities selloff and the strengthening dollar do “represent some tightening of financial conditions.”6

On the whole, investors reacted positively to the news. In the wake of the announcement, the Dow Jones Industrial Average, Nasdaq Composite, and S&P 500 were all up more than 1%, with the S&P cresting the 2,000 mark and the Nasdaq approaching the 5,000 level. The CBOE VIX quickly dipped under 20.6

In one respect, it was a day of reassurance for investors – but it was also a day that brought signals that the Fed would soon start the process of normalizing monetary policy.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.
1 – marketwatch.com/story/federal-reserve-keeps-interest-rates-unchanged-but-forecasts-hike-this-year-2015-09-17

[9/17/15] 2 – msn.com/en-us/money/markets/stocks-rise-as-fed-hike-odds-fade/ar-AAenA97?li=AA9ZWtY [9/16/15] 3 – briefing.com/investor/calendars/economic/2015/09/14-18 [9/17/15] 4 – forbes.com/sites/greatspeculations/2015/09/16/why-the-fed-will-not-hike-rates-this-year/ [9/16/15] 5 – dailyfx.com/calendar/bank-calendar.html [9/17/15] 6 – blogs.marketwatch.com/capitolreport/2015/09/17/live-blog-and-video-of-fed-decision-and-janet-yellen-press-conference-2/ [9/17/15]
By | 2017-11-20T15:20:38+00:00 September 23rd, 2015|Financial Article|