A perspective from E*TRADE Capital Management, LLC
What could this mean for markets?
Fed’s decision comes as a surprise following comments
In what many may call quite the surprise, after its scheduled meeting on March 15, 2017, the Federal Open Market Committee (FOMC) announced that it will leave interest rates unchanged. The FOMC’s benchmark interest rate, known as the fed funds rate, remains in a range of 0.50–0.75%, or 50–75 basis points (a basis point is one one-hundredth of a percent).
The decision surprised the market following Fed comments in the run-up to the meeting and may cause an uptick in volatility. In explaining its decision, the committee acknowledged generally healthy economic conditions, the strengthening labor market, and a continued pickup in inflation data. However, the committee seemingly did not see enough compelling evidence of the durability of that data to move interest rates higher at this time.
Consensus indicates that the next FOMC meeting with a press conference, June 14, is the most likely scenario for a rate increase, barring an extraordinary event.
What could this mean for markets?
The road to this decision has been winding indeed. Market participants initially appeared undecided about whether the Fed would move, but expectations for a rate increase shifted dramatically following the release of the Fed’s January 31–February 1 meeting minutes and gathered momentum on comments from Fed officials thereafter.
However, bond yields are at levels similar to those immediately following the rate increase in December, which some believe indicate that the fixed income market did not expect a hike. This may have factored into the Fed’s decision, as the committee seems intent on avoiding significant volatility.
- An unclear fate for U.S. equities. The debate on what will happen in these markets will likely rage for days or weeks to come. A continued dovish Fed could help market momentum. In addition, history remains on the side of U.S. stocks: The bull market that began in early 2009 remains intact, and secular bull markets often last for more than a decade. On the other side of the coin, market participants could view the Fed holding steady as a sign that higher growth will not materialize, resulting in selling pressure on U.S. equities.
Source: Standard & Poor's
- A similar story for international equities. If the U.S. dollar weakens, it could create a challenging environment for international companies, especially those that depend heavily on U.S. customers. In turn, reduced exports to the U.S could pressure earnings. Local currency strength could help U.S. investors in foreign stocks as values increase when converted to U.S. dollars.
- A small boost for fixed income possible. Some market observers believe fixed income markets may rally, with shorter-term bonds two years and less potentially the biggest benefactor because they are typically the most sensitive to changes in fed funds policy. This will likely mean a steepening yield curve. Many predict interest rates will remain at low levels, though they are unlikely to test the record lows set in mid-2016.
Source: U.S. Department of the Treasury
The Fed could still deliver on its projections
Heading into the year, the Fed suggested three rate increases of 25 basis points each for 2017. That target is still a possibility, and futures markets appear to be in sync with a year-end fed funds rate in the range of 100–150 basis points. Factors that could influence the Fed’s decision include new economic data (particularly output growth, labor market expansion, and core inflation), future fiscal, tax, and trade policy, not to mention the market’s reaction to today’s news.
The bottom line for investors
All investors can use market events, like Fed decisions, as opportunities to review and rebalance their portfolios as appropriate, keeping them aligned with their risk tolerance. We continue to 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 for all types of market developments over the long term.
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 contact your E*TRADE Financial Consultant if you have one, or call us at 1-800-ETRADE-1 (1-800-387-2331). We’re always ready to help.