Bah Humbug . . . No Presents from the Fed This Year

December 19, 2018  | by Ryan Driscoll

Market Commentary

But at least it’s not the Grinch Who Stole Christmas…Recent volatility in the financial markets and a bit of softer inflation data had investors hoping for a holiday season treat from the FOMC in December. An immediate pause in interest rates was very unlikely, but some guidance towards a slower pace in rate increases accompanied by a dovish tone from the committee would have been more than welcome.

The only sign of relenting by the Committee can be seen in the forward rate projections of the terminal, or neutral, long run interest rate which dropped from 3 percent to 2.75 percent. Otherwise, it appears that Federal Reserve Chairman Jerome Powell and the other voting members believe the economy is strong enough to absorb two more rate hikes in 2019 and the continued shrinking of the balance sheet. This was the 9th time the Committee hiked interest rates since December of 2015 and the new upper bound for the Fed Funds rate is 2.50 percent.

img-chart-bah-humbug-rate-hikes-FedDot

The chart above tries to “Connect the dots” of the Fed’s game plan. Essentially, each curve represents the financial markets best guess at each point in time for the Fed’s path to higher rates. As the chart indicates, while more rate hikes are expected, as of December 2018, the general consensus of the market is less bearish than in June of this year.

...Fed members left their outlooks for economic growth, employment and long-run inflation largely intact...

Fed commentary on the economy was positive stating “economic activity has been rising at a strong rate” and maintaining that the “risks to their outlook is roughly balanced.” In a press conference, Powell cited both positives for the economy such as a strong labor market and wage gains, while pointing to some developments that suggest growth is softening. He said relatively benign inflation gives the Fed room to be patient in setting policy.

The changes to the economic forecasts released along with the FOMC policy statement show that Fed members left their outlooks for economic growth, employment and long-run inflation largely intact.

  • The median 2020 and 2021 forecasts for GDP growth were unchanged at 2 percent and 1.8 percent, respectively, while the longer-run figure increased to 1.9 percent from 1.8 percent.
  • The median unemployment-rate estimate for 2019 was unchanged at 3.5 percent, while the 2020 estimate increased to 3.6 percent from 3.5 percent. The longer-run figure fell to 4.4 percent from 4.5 percent.
  • The median estimates for PCE and core PCE[1] inflation each fell by 0.1 percentage point in 2019 to 1.9 percent and 2 percent, respectively.

Ultimately, the message from the FOMC was not the gift investors were looking for but there was a slight shift in tone and perhaps the stage has been set for a pause in rate increases in 2019. Chairman Powell was emphatic that political considerations would not play a role in Fed policy making when questioned by reporters. However, a sudden change in the trend of economic data or perhaps a further deterioration in the geopolitical environment will certainly be a factor in Fed policy making for 2019.

[1] The personal consumption expenditure price index (PCEPI) is one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy.

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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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.