Fed stays consistent; what's next for rates?


Fed stays consistent; what’s next for rates?

During testimony before the Senate Banking Committee on Feb. 26, Federal Reserve (Fed) Chairman Jerome Powell made it clear that the Fed is not changing its guidance in the near term.

Powell’s comments were consistent with messaging from January’s Federal Open Market Committee meeting, which cited the importance of patience in future policy decisions. While strong wage growth and inflation remains in line with the Fed’s dual mandate of maximum employment and stable prices, headwinds and conflicting data are becoming evident. Market reaction to the testimony was mostly muted with equities relatively flat, while Treasuries moved modestly higher.

Susan Regan, a fixed income portfolio manager with Ivy Investment Management Company, says the market provided a clear message in late 2018 about its stability and further interest rate increases. “We continue to believe the Fed will take a ‘wait and see’ approach due to a great deal of uncertainty regarding trade and economic growth,” Regan says. “We believe the Fed’s patient approach will allow more time for the previous hikes to affect the economy and for the Fed to get more economic data as a guide.”

The market uncertainty has been driven by trade tensions with China, concerns about Europe’s economy and the evolving Brexit situation, as well as the economic impact of the recent government shutdown.

Based on these factors and a view that inflation will be contained this year, Ivy believes the Fed will not raise rates in 2019.

“Many individuals, both inside and outside the Fed, believe the neutral federal funds rate is 3% or lower. With the current range at 2.25% to 2.50%, we may already be at neutral,” adds Regan.

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The opinions expressed are those of Ivy Investment Management Company and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through February 2018, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.