The Federal Reserve (Fed) left rates unchanged today, in line with Invesco Fixed Income’s base case scenario and bond market expectations — bond futures markets had priced in a below-50% chance of a rate hike today. The tone of the Fed’s statement was relatively balanced, in our view. It didn’t signal whether a hike in 2015 or next year was preferable.
The Fed’s rationale for not hiking was based on a combination of increased uncertainty caused by volatile global markets and continued low US inflation. The statement mentioned that risks to the Federal Open Market Committee’s (FOMC) economic outlook were balanced, but that global developments would continue to be monitored. In her press conference, Fed Chair Janet Yellen stated that the FOMC is also concerned with financial conditions — lending and financial market conditions — but only to the extent they may negatively impact the FOMC’s outlook for growth and inflation through damaged confidence. The Fed also released its summary of economic projections, which shows that, while the Fed is slightly more bullish on near-term growth, longer-term growth expectations are lower.
Interest rate markets rallied sharply following the Fed’s statements, led by shorter-term interest rates. We believe that economic growth in the US will remain firm. However, we believe that the Fed has left enough uncertainty on the table that risk assets will likely remain volatile. We’re watching evidence of consumer spending and confidence closely to analyze the potential effects of volatile markets on growth. We believe it’s likely the Fed will hike in 2015.
Written By Robert B. Waldner, Jr., CFA; Chief Strategist and Head of Multi-Sector at Invesco