A perspective from E*TRADE Capital Management, LLC
There’s stubborn. And then there’s stubborn. Currently, inflation leans toward the latter, despite the recent uptick. Wage growth too. Continued low readings for both contributed to the Federal Open Market Committee (FOMC) leaving interest rates unchanged at its policy meeting on Wednesday. The FOMC’s benchmark interest rate, known as the fed funds rate, remains in a range of 1.00–1.25%, or 100–125 basis points (a basis point is one one-hundredth of a percent).
The Federal Reserve (the Fed) indicated economic growth continues to trudge along, but that it needed more evidence to justify bumping interest rates higher at the moment. The decision reflects the Fed’s stated intention to increase rates gradually, and as appropriate, on its long journey to normalize monetary policy after the financial crisis.
The Fed was able to make some progress on that goal by announcing it will begin to gradually unload the $4.5 trillion of debt that it brought on its balance sheet during and after the financial crisis. Starting in October, the runoff is likely to include scaled back reinvestments in Treasuries and mortgage-backed securities.
What could this mean for the market?
In recent history the Fed hasn’t been all that shy about signaling its intent. Comments from Fed officials leading up to Wednesday’s announcement had most market participants expecting a hold. It’s an old adage that the market loves certainty, and as such this decision is unlikely to catch it off guard or produce notable volatility.
As to what could happen, here’s what we’ll be watching:
- Equities—Stocks in the U.S. continue to shake off uncertainties, including domestic politics, geopolitical tensions abroad, and the effects of Hurricanes Harvey and Irma. Some observers may be looking for a possible bump following the Fed’s decision, although any benefit may be priced in given this was the expected outcome. On the international front, if the U.S. dollar weakens further after this announcement, it could create headwinds for international companies, especially those that depend heavily on U.S. customers. However, that same dollar weakness will likely help investors with holdings in foreign equities as currencies appreciate.
- Fixed income—Bond watchers seem to think the credit market is likely to take the announcement in stride, perhaps nudging investors further out on the maturity spectrum in search for yield. Riskier assets, including emerging market debt, which is already having a strong year, may see additional interest as well.
Sources: Standard & Poor's and the U.S. Department of the Treasury
Is a rate increase on the horizon?
Heading into 2017, some Fed officials predicted three rate increases of 25 basis points each for the year. As of yesterday, recent target rate probabilities released by CME Group put a December rate hike at over 50%, which is up about 15% from a month ago.1 The FOMC has said that future adjustments will reflect, among other factors, its assessment of “realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation.”2
Source: U.S. Department of the Treasury
The bottom line for investors
This decision from the Fed reaffirms that its hiking pace will be measured. It appears the committee believes the growth story remains intact and that it doesn’t want to disturb it at this juncture.
For investors, market developments, including Fed decisions, can be opportunities to review and rebalance their portfolios, which will help keep them aligned with their investment goals and risk tolerance. We believe that investors with well-diversified portfolios of domestic and global equities, fixed income securities across the credit and maturity spectrum, and cash should be well-positioned over the long term for all types of market scenarios.
At E*TRADE, we’re committed to helping you make sense of the markets. If you have questions or would like to talk about your portfolio, please don’t hesitate to visit us at etrade.com to chat with us online, send us an email, or call us if you like at 1-800-ETRADE-1 (1-800-387-2331). We’re always ready to help.
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1. As of September 19, according to the CME Group’s FedWatch Tool. http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html
2. Minutes of the Federal Open Market Committee, July 25–26, 2017. https://www.federalreserve.gov/monetarypolicy/files/fomcminutes20170726.pdf