Federal fund rates unchanged — for now

Coming out of the June 16-17 Federal Open Market Committee (FOMC) meeting, committee members are on the same page about a downgraded outlook for U.S. economic growth for 2015. With that, the fed funds rate is staying unchanged — but only for now. As we move through the second half of 2015, most FOMC members expect to shift rates higher, justified by economic improvements that include a stronger labor market and the likelihood that inflation will eventually — not tomorrow, but eventually — move back toward 2%.

Following the meeting, we witnessed the U.S. Treasury yield curve (for bonds between 5-year and 30-year maturities) steepen to 150 basis points, its steepest point in one month. We think it’s fair to surmise that investors currently want to be in the middle- and front-end of the curve in light of potentially higher inflation. This has led to softer demand for bonds on the long end of the curve (sending yields higher), and firmer demand for shorter-dated bonds (pushing yields lower).

Aside from the likelihood that rate increases will happen within the next six months, we believe it’s worth considering the trajectory that formal rate hikes will take. Current indications suggest that rates will rise in a measured, orderly way. While this doesn’t completely rule out some degree of market volatility, we think markets will interpret the direction of rates as a natural and gradual path toward normalization.

The views expressed represent the Manager's assessment of the market environment as of June 2015, 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.

Investing involves risk, including the possible loss of principal.

Past performance does not guarantee future results.

Fixed income securities may also be subject to prepayment risk, the risk that the principal of a fixed income security may be prepaid prior to maturity, potentially forcing an investor to reinvest that money at a lower interest rate.

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