Subjective Data Dependency06-23-2015 |
Subjective Data Dependency
The Federal Open Market Committee decided last week to leave the Fed Funds Rate unchanged at the current level of 0.00% – 0.25%. Despite the economic improvements that have taken place, this was widely expected on Wall Street and estimates for the first rate hike, according to the FOMC’s projections, now appear balanced between September and December. What sometimes is lost in discussions about the timing of the Fed Funds Rate increase is what changes in this benchmark are designed to accomplish. Through cause and effect relationships, increases and decreases in the Fed Funds Rate are meant to accomplish the Feds’ “dual mandate” of trying to help promote maximum employment and stable inflation. In evaluating the status of these two objectives, FOMC members analyze both the current economic readings as well as their projections for PCE (inflation) and the long term unemployment rate. According to information released Wednesday, in 2015 the U-3 unemployment rate is expected to average between 5.0% – 5.2% and inflation is expected to average 0.6% – 0.8%. Over the long term (i.e. 2018 and beyond), projections for the unemployment rate are expected to average between the same 5.0% – 5.2% range while inflation is expected to be 2.0%. In the FOMC statement, also released Wednesday, Fed Chair Janet Yellen stated that:
“On balance, a range of labor market indicators suggests that underutilization of labor resources diminished somewhat… Inflation continued to run below the Committee’s longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports… Survey-based measures of longer term inflation expectations have remained stable.”
Based on this statement it appears that all of the pieces have fallen, or at least are falling, into place for an upcoming Fed Funds Rate hike. The message of data dependency as it relates to the timing of the first rate hike has been consistent but as data continues to be released that supports a hike we are getting a glimpse at the amount of subjectivity that’s been built into this message. Surely the concerns Yellen has expressed regarding the lack of wage growth and overall level of inflation are well founded, but we continue to believe that the timing of this first rate hike, whether in September or December, will not have material effects on achieving the Fed’s dual mandate. On the other hand, what we view as more important, is the pace and duration of the tightening cycle.
In the face of this release, U.S. markets posted gains across the board with the S&P 500 Index gaining 0.8%, the NASDAQ Index gaining 1.3%, and the Russell 2000 Index advancing 1.6% last week. Internationally, markets priced in additional concerns over the future of Greece with the MSCI EAFE Index falling 0.4%. With the many uncertainties surrounding the global capital markets, we continue to strongly encourage investors to have their portfolio strategies reviewed. If you have not done so already, please speak with your Hennion & Walsh Financial Advisor or a member of the Hennion & Walsh Asset Management Team about initiating the portfolio review process.
Sources: Equity Market, Fixed Income and REIT returns from JP Morgan as of 6/19/15. Rates and Economic Calendar Data from Bloomberg as of 6/22/15.
Important Information and Disclaimers
Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion and Walsh cannot guarantee the accuracy of said information and cannot be held liable.
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