Reading a more “dovish” Fed on latest interest rate decision
March 22, 2016
As the U.S. Federal Reserve once again stepped back from plans to raise interest rates, it appears that the Fed is becoming more dovish in its monetary tightening efforts than many market observers had expected.
At its meeting on March 16, the Federal Open Market Committee (FOMC) voted to leave rates unchanged, at a range of 0.25% to 0.50%. While the ultimate decision was widely expected, the Fed’s statements that accompanied the decision were viewed as much more dovish than anticipated.
The FOMC stated that although it expects economic activity “will expand at a moderate pace and labor markets will continue to strengthen, global economic and financial developments continue to pose risks.” A result of this thinking is that the Fed, which had previously anticipated four rate hikes by the end of 2016, is signaling that it is now cutting back that forecast to only two interest rate hikes by year end.
Indeed, many had expected that the Fed would reduce the level of its “dot plot” — a chart that summarizes projections for the Fed’s short-term target interest rates — but its lowering of expectations was more aggressive than most market participants anticipated.
The Fed’s comments also centered more on global economic conditions, rather than inflation in the United States. For example, Fed Chairwoman Janet Yellen spoke at a press conference after the FOMC meeting about a shift in most assessments of the appropriate policy path. “That largely reflects a somewhat slower projected path for global growth, for growth in the global economy outside the United States, and for some tightening in credit conditions in the form of an increase in spreads,” Yellen said.
The Fed decision and commentary came on the heels of interest rate cuts and monetary policy actions earlier in March by the European Central Bank in its latest stimulus effort. These announcements from the European Central Bank and the Fed should be supportive of risk assets, in our view. While we continue to add investment-grade corporate risk to our fixed income portfolios, we are doing so on a highly selective basis. Overall, we remain cautious about the fundamental backdrop of the economy.
The views expressed represent the Manager’s assessment of the market environment as of March 2016 and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the Manager’s views.
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