The Federal Reserve made no move on rates today, in line with market expectations.
The Federal Open Market Committee cited diminished employment gains and soft business investment numbers as key factors in its decision. Chair Janet Yellen also acknowledged in her press conference that June 23’s Brexit vote, and its potential impact on the U.S. economy, factored into the Committee’s decision.
“I think the one surprise was that it was a unanimous decision,” says Jon Adams, senior investment strategist and portfolio manager, BMO Global Asset Management in Chicago. He points out that Esther George, president of the Kansas City Fed, wanted hikes in recent meetings but followed the majority view this time around.
Adams notes we’re a long way from expectations at the start of the year. “We came into the year with the Fed telling us four hikes; and then [it] changed to two hikes, and now it looks like [we] might not even get one hike at all this year.” He says the market doesn’t expect the Fed to raise rates until at least the end of this year. “It seems that the Fed’s expectations have gotten more in line with market expectations over the past six months or so.”
The Fed appears confident that labour market indicators will strengthen. “We got the bad payrolls number last month and that pushed out expectations,” notes Adams. “I think the key question is: If we get a solid payrolls number next month, does that put the Fed back on track?”
The overall posture for global central banks in general is “incredibly accommodative,” adds Adams. “They don’t want to upset the apple cart; they don’t want to be accused of a policy mistake of raising rates too quickly. It seems that over and over again the Fed’s kind of bowed to the market as far as market expectations.”
Adams suggests investors shouldn’t let the “roller coaster ride” of rate hike expectations rattle their focus on medium- to longer-term signals. “We think that’s very important in these times where there’s so much focus on the short term.” These short-term changes in expectations, he adds, “really speak to the need for a disciplined and consistent process […]. It’s very difficult to get shorter-term signals correct.”