Too much emphasis is being placed on the significance of this event, one advisor said as the FOMC announced it was keeping rates unchanged.
Maybe the market should have taken the Fed at its word, that it would raise interest rates only after it had seen “further improvement in the labor market” and was “reasonably confident that inflation will move back to its 2% target,” and not have been so uncertain about today’s Fed decision beforehand.
Even though unemployment fell in August, to 5.1% from 5.3% in July, inflation also declined, for the first time since January. Consumer prices dropped 0.1%; excluding food and energy prices, they rose at a 1.8% annualized rate — still below the Fed’s 2% target.
The Fed meeting was a non-event. The cental bank maintained the near zero rate policy it put it place almost seven years ago, but today it gave another reason for deciding against a rate hike: “developments abroad,” primarily the downturn in China’s financial markets and economy, which Chair Janet Yellen referenced in her press conference afterward.
Still, 13 of the Fed’s 17 policymakers — which include the Fed chair, Fed governors and five Fed bank presidents — predicted the central bank would raise rates by at least 0.25% this year. (There are two more FOMC meetings — in October and December.) Richmond Fed President Jeffrey Lacker dissented from today’s FOMC dissension, voting for an immediate hike.
Although the timing of the Fed’s next rate move remains unknown the direction is not.
Jim O’Sullivan, chief U.S. economist at High Frequency Economics, agreed. “There is no clear signal” about when the Fed will tighten, O’Sullivan wrote in a note following release of the Fed’s policy statement.
Kenefick said she will be reminding clients “that any debt restructuring or financing needs they have will be better secured sooner rather than later,” but not much beyond that.
Financial advisors and economists we heard from after the Fed announcement said they are not recommending any changes to portfolios currently or in anticipation of a Fed rate hike.
Unlike some advisors, Burns said it’s likely that longer-term rates would decline further because the Fed controls only short-term rates and global investors are attracted to U.S. bonds because they currently have the “highest rates” of any bonds in developed markets.
After the Fed’s decision Thursday the yield on Treasury bills turned negative while the yield on the 2-year Treasury note fell to 0.68% from 0.81% at Wednesday’s market close and the yield on the 10-year Treasury dropped to 2.22% from 2.30%. Treasury prices, which move in the opposite direction of yields, rose. Stock prices fell slightly — down 65 points on the Dow and five points on the S&P 500.
While the Fed made no move on interest rates it did revise its economic projections for 2015 through 2018, but none of the revisions argued for a near-term rate hike. Its median projections for 2015 GDP rose to 2.1% from the 1.9% it projected in June and for unemployment the outlook fell to 5% from 5.3%. Its inflation outlook remained muted, with the median personal consumption expenditures (PCE) forecast to rise 0.4% increase, down from 0.7% previously; excluding food and energy,the PCE was projected to increase 1.4%, up from 1.3%.