Sep

28

The Fed Decides to Wait

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

Recently 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 recently, 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.

 

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]

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. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. 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 material was prepared by MarketingLibrary.Net Inc., for Mark Lund, Mark is known as The 401k Advisor, Investor Coach, The Financial Advisor, The Financial Planner and author of The Effective Investor. Mark offers investment advisory services through Stonecreek Wealth Advisors, Inc. an independent, fee-only, Registered Investment Advisor firm providing 401k consulting for small businesses and financial Advisor services for professional athletes and individuals. Stonecreek is located in Salt Lake City, Murray, West Jordan, Sandy, Draper, South Jordan, Provo, Orem, Lehi, Highland, Alpine, and American Fork in Utah.

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Mark K. Lund is the firm's founder, CEO and author of The Effective Investor, a #1 Best Seller. He has written articles for or been quoted in: The Wall Street Journal, The Salt Lake Tribune, The Enterprise Newspaper, The Utah Business Connect Magazine, US News & World Report, and Newsmax.com, just to name a few.  Mark publishes two newsletters called, “The Mark Lund Growth Report” and “Mark Lund on Money.”  Mark provides CPE (continuing professional education) courses for CPAs.  You may also have seen him on KUTV Channel 2, or as a guest speaker at a local association or business. Mark provides investment and retirement planning services for individuals and 401(k) consulting for small businesses. In his book, The Effective Investor, Mark exposes the false narrative magazines, media, big Wall Street firms, and most advisors want you to believe. The good news is that Mark will show you that you don’t need their speculative ways of investing in order to be successful. Get a free copy when you schedule your initial consultation.

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