The Fed Stays the Course

March 22, 2018  | by Ryan Driscoll, Kristofer Kwait

Industry Knowledge | Market Commentary

An increase in the Fed Funds rate at the March FOMC meeting was a forgone conclusion. 

It was universally accepted by the investment community that the committee, led by newly minted Chairman of the Federal Reserve Jay Powell, would raise the upper bound of the Fed Funds rate from its previous level of 1.50 percent to the new level of 1.75 percent.  The biggest unknown was whether the new chairman would continue the cautious approach of his predecessor, Janet Yellen, or choose a slightly more aggressive stance in removing the accommodative policies of the last ten years.

Fed Forecasts Remain Largely Consistent

The key pieces of the Fed’s post meeting communication were the statement and the committee’s projected path of policy interest rates (“dot” plot). The FOMC clearly recognized that the economy is picking up momentum and inflation remains within a comfortable range as reflected in their statement, “The economic outlook has strengthened in recent months…” The statement reiterated their expectation that price gains will stabilize around the Fed's two percent target over the medium term. Finally, officials repeated previous language that they anticipate “further gradual adjustments in the stance of monetary policy.”

The changes to the economic forecasts released, along with the FOMC policy statement, show that a few Fed members have raised their forecasts for economic growth and lowered their forecasts for the civilian unemployment rate. Interestingly, there was very little change in the inflation forecasts.

  • The median forecast for 2018 GDP was revised up to 2.7 percent from 2.5 percent. The forecasts are now factoring in fiscal stimulus.

  • The long-run unemployment rate median estimate fell to 4.5 percent, however, in the near term Fed officials expected unemployment to fall to the mid-three percent range.

  • The median estimates for PCE inflation were relatively unchanged for headline and core.

The Fed “dots” reflected changes in the projected path of interest rates. The consensus forecasts continue to reflect an expectation for three rate hikes in 2018. Looking further out the curve, 2019 and 2020 are where the dots shifted the most.  The 2018 average forecast was 2.13 percent which was unchanged from December. The 2019 and 2020 average rose to 2.9 percent and 3.4 percent, respectively. The long-run average rate expectation increased to 2.9 percent.

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How Do the “Dots” Factor into Our Point-of-View?

The Fed Funds rate is now at 1.67 percent and inflation is running at roughly 1.8 percent (core) and 2.2 percent (headline). In our opinion, monetary policy continues to be easy and remains supportive of risk assets until the fed funds rate is at least 50 basis points higher than inflation. This implies that we still have three more 25 basis point rate hikes before we get to neutral monetary policy. Based on the current dot plots, the market predicts that this happens sometime next year. We are also focused on longer-term rates which have not moved much since the announcement and are currently at 2.9%. We believe that until the 10-year Treasury yield is at 3.5 percent equities remain attractive relative to bonds, supporting our continued constructive view on equities.

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Authors

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Ryan Driscoll is responsible for trading, investment analysis. He is a member of the Treasury Solutions team since its inception. Ryan is an active participant in the investment and rebalancing process, manages the quarterly reporting process and is actively engaged with Treasury clients. Prior to joining Commonfund, Ryan worked at Sailfish Capital Partners, a multi-strategy fixed income fund, where he served on the Emerging Markets team. Prior to that, he was on the fixed income team at Grantham, Mayo, Van Otterloo & Co. and was an equity/fixed income trader at Loring, Wolcott and Coolidge, in Boston. Ryan received his B.S. in Finance and M.S. in Global Financial Analysis (with Distinction) from Bentley College. He is a CFA Charterholder and is a member of the Boston Securities Analyst Society and CFA Institute.
Ryan Driscoll
Director, CFA
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Kristofer Kwait is Head of Investments and responsible for leading the marketable equities, fixed income, hedge funds and real assets investment teams as well as analytics. Prior to his current role, Kris was head of the Hedge Fund Strategies Group. Previously, he served as head of hedge fund research with responsibility for overseeing the design and implementation of proprietary models for manager selection, portfolio construction, and risk management. Before joining Commonfund, Kris was a proprietary trader at both Andover L.L.C. and A.B. Watley where he managed relative value equity strategies. Prior to his experiences as a trader, he was a stockbroker at Smith Barney. Kris attended pre-college at Juilliard School of Music, has a B.S. from Purdue University and an M.B.A. from the Yale School of Management.
Kristofer Kwait
Managing Director, Head of Investments
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Disclaimer

Information, opinions, or commentary concerning the financial markets, economic conditions, or other topical subject matter are prepared, written, or created prior to printing and do not reflect current, up-to-date, market or economic conditions. Commonfund disclaims any responsibility to update such information, opinions, or commentary. To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated in this material. Forecasts of experts inevitably differ. Views attributed to third parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Managers who may or may not subscribe to the views expressed in this material make investment decisions for funds maintained by Commonfund or its affiliates. The views presented in this material may not be relied upon as an indication of trading intent on behalf of any Commonfund fund, or of any Commonfund manager. Market and investment views of third parties presented in this material do not necessarily reflect the views of Commonfund and Commonfund disclaims any responsibility to present its views on the subjects covered in statements by third parties. Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Commonfund fund. Such statements are also not intended as recommendations by any Commonfund entity or employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information. Past performance is not indicative of future results. For more information please refer to Important Disclosures.