No surprises: Fed keeps interest rates unchanged

We maintain our balanced assessment of risks for investors

The U.S. Federal Reserve (Fed) held interest rates unchanged today following its scheduled two-day meeting, an outcome widely expected by Fed observers and market participants. Fed Chairman Jerome Powell reaffirmed the base case is to hold rates steady for now, allowing the three rate cuts in 2019 to continue to work through the economy. The Fed vote was 10-0, the first unanimous vote since May 1, illustrating broad consensus for the current policy within the Fed.

Inflation remains a key determinant for future interest rate policy. Powell stated he would want to see “a significant move up in inflation that is also persistent before raising rates.” Market prices imply investors still see a chance of another rate cut next year, but the gap between investor expectations and the Fed’s outlook has compressed in recent months, mitigating monetary policy risk. Stocks rose slightly after the statement and Powell’s comments, led by emerging markets, as the bar for rate increases remains high given muted inflation. Bond yields, which move inversely with prices, fell slightly on the market adjusting to the message around lower for longer policy rates.

Investors focused on Chairman Powell’s press conference, economic projection updates, and comments around strains in the short-term lending markets. Persistently low inflation was a main topic of the press conference, with the dialogue reinforcing the challenges of increasing policy rates any time soon. The summary of economic projections, which aggregates individual Fed participants’ forward views, indicated no material changes to the growth and inflation outlooks and a lower unemployment rate. The Fed’s “dot plot,” which shows FOMC members’ forecast for year-end policy rates, indicates the median expectation is for rates to remain steady in 2020 before rising slightly beginning in 2021. Expectations were revised lower reflecting the Fed’s patient approach, with the range of outlooks consolidating.

Powell indicated ongoing commitment to ensuring ample liquidity is available in short-term cash lending markets. A schedule of Federal Reserve Bank of New York operations through year-end will be provided tomorrow morning. If tomorrow’s announcement falls short of expectations (which we see as unlikely) the Fed would still maintain the option to increase the size of short-term operations as year-end approaches and institutional cash needs rise.

We remain focused on the trend in domestic and international economic data. We track hundreds of economic data points across the globe via our proprietary “Health Check” monitor, which indicates the global economic data remains sluggish, but with weaker data appearing largely behind us and signs of bottoming momentum. Odds of a recession remain modest globally and subdued for the United States. Central banks remain a tailwind to economic activity with low rates and asset purchases by the Fed, European Central Bank (ECB), and Bank of Japan (BOJ).

We maintain our balanced assessment of risks between stocks and bonds, which is guiding our recommendation to hold stock and bond allocations close to long-term strategic target allocations. This reflects higher levels of volatility across global equity markets and lower bond yields in the United States relative to year-ago levels. We recommend high-quality bonds comprise the majority of bond portfolios to provide adequate portfolio diversification against riskier holdings.

As always, we value your trust and are here to help in any way we can. Please do not hesitate to let us know if we can help address your unique financial situation or be of assistance.