While ever so subtly, the Fed told markets it is done with the handholding. Its own policy of transparency has been too easy for market participants to follow, thus lowering the ‘surprise’ factor to policy changes. Several Fed governors hinted at this over the past few months, preferring “the old way” where there was some semblance of privacy for the committee. The era of transparency is not over, but it is transitioning.
In a major alteration from previous statements, the Fed dropped the hints of when it will raise rates, other than to say it was unlikely at the next meeting. Each of the twelve governors still provided a forward path of where they believe interest rates will be in the future, placing the Fed Funds rate at 0.625% as the median projection for the end of 2015, above the current policy range of 0.0% – 0.25%.
The Federal Reserve lowered expectations for growth and inflation along with a faster decline in the unemployment rate. The general consensus from the media and traders was that the Fed succumbed to the market by lowering expectations for the future path of interest rates and economy. Nonetheless, on the interest rate side the Fed governors’ fed funds rate projections came closer to what the economy could realistically handle given low demand and supply of credit.
The Fed’s mandate is full employment and steady inflation. Employment is improving steadily and may go lower than the Fed’s projections, as it has the past several years. The Kansas City Fed’s Labor Market Conditions measure is the most recent addition to the Fed’s labor analysis toolbox. In both 1994 and 2004, when momentum crossed above zero (in the sky blue line), the interest rate hiking cycle commenced.
Inflation is currently running below the 2% target as it has for the last six years, despite 0% interest rates and all of the quantitative easing programs. Perhaps it goes to show that inflation is much more than a monetary phenomenon (that is, the fiscal side matters too). This is the variable holding back the Fed from completing its mandate and changing interest rate policy.
Even though interest rates declined of late, we see many smart managers running portfolios at below average durations, meaning they are minimizing interest rate risk compared to previous history. This seems to makes sense, though it is with the consensus that expects higher interest rates, a consensus that has been incorrect for the last 15 months.
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This material is based on public information as of the specified date, and may be stale thereafter. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates.