Newly Patient Fed Hits Pause
- March 21, 2019
Our fixed-income portfolio managers share their views on the FOMC’s decision to keep short-term interest rates unchanged and lower its rate-hike forecast and economic projections for 2019 and 2020.
The FOMC voted unanimously on Wednesday to keep short-term interest rates unchanged in the wake of late-2018 market turmoil spurred by Brexit, trade tensions and concerns over slowing economic growth. The target range for the federal funds rate remains at 2.25% to 2.50%.
“We’re being patient,” Federal Reserve Chairman Jerome Powell said in a press conference. “We don’t see data that compels us to move rates in either direction. It may be some time before we see a clear need for an adjustment in policy.”
The Fed’s revised forecasts revealed a considerably more dovish stance on monetary policy despite reassurance that the economic picture remains bright. According to its “dot plot,” the Fed doesn’t plan to raise interest rates again in 2019 and only once in 2020. Projections published after its December meeting indicated that the Fed would raise rates twice this year and once in 2020.
The FOMC also pared some of its economic projections:
- GDP growth for 2019 was revised down to 2.1% from 2.3%. The median growth forecast for 2020 was revised down to 1.9% while the 2021 forecast remained unchanged.
- The unemployment rate for 2019 was revised upward to 3.7%, while the 2020 estimate increased to 3.8% from 3.6%. The longer-run forecast dropped to 4.3% from 4.4%.
- PCE inflation was trimmed to 1.8% from 1.9% in December but core PCE inflation for 2019 was unchanged at 2%.
Despite dialing back forecasts and a more dovish tone, Powell expressed continued confidence in the economy. “We’re seeing a modest slowdown but our outlook continues to be a positive one,” said at the press conference. “We see growth of around 2%. Economic fundamentals are still very strong.” He cited rising incomes, low unemployment, strong job creation and high levels of confidence among consumers and businesses as key drivers.
Playing Defense
In taxable fixed income, we remain focused on corporate profitability and balance sheets. While a slowing economy is not going to result in further growth in margin and profitability expansion, we believe the companies we have invested in should remain profitable and are investing capital expenditures to enhance operating margins. They’re also less aggressive with balance sheet leverage expenditures to enhance operating margins. They’re also less aggressive with balance sheet leverage nears. Overall, today’s announcement—like many over the past eight years—leads us to an extended “muddle through” economic environment.
Munis Still on the March
The Fed’s actions were not surprising given the increasing threat of slowing global growth and minimal inflationary pressures. Immediately prior to the announcement, the scale of 10-year AAA municipal bonds was 0.02% lower on the day and 0.25% lower year to date. Despite the recent drop in rates, we believe municipal bond yields continue to offer high-net-worth individuals an attractive rate of return, especially when evaluated on a taxable-equivalent basis. Our outlook for municipal bonds was quite favorable heading into 2019 and the Fed’s announcement only strengthens our forecast for attractive returns in the asset class this year.
DISCLOSURES
Tax-Exempt Municipal Bonds are issued by state and local governments as well as other governmental entities to fund projects such as building highways, hospitals, schools, and sewer systems. Interest on these bonds is generally exempt from federal taxation and may also be free of state and local taxes for investors residing in the state and/or locality where the bonds were issued. However, bonds may be subject to federal alternative minimum tax (AMT), and profits and losses on bonds may be subject to capital gains tax treatment. Municipal securities may lose their tax-exempt status if certain legal requirements are not met, or if tax laws change. The financial condition of the issuer may change over time and it is important to monitor the changes because they may affect the ability of the issuer to meet its financial obligations. The MSRB's EMMA website (www.emma.msrb.org) allows investors to sign up to receive alerts about the availability of important information that may affect their municipal bonds. The MSRB makes official statements and continuing disclosures submitted to it by issuers and others available to the public for free through its EMMA website. EMMA also provides municipal securities trade price information through its Real-time Transaction Reporting System ("RTRS") and free public access to certain municipal credit ratings. See more at: http://www.finra.org/investors/alerts/municipal-bonds_important-considerations-individual-investors#sthash.snkM0mxf.dpuf
High-yield bonds, those rated below investment grade, are not suitable for all investors. The risk of default may increase due to changes in the issuer's credit quality. Price changes will occur as a result of changes in interest rates and available market liquidity of a bond. When appropriate, these bonds should only comprise a modest portion of a portfolio.Liquidity risk refers to the risk that investors won’t find an active market for a bond, potentially preventing them from buying or selling when they want and obtaining a certain price for the bond. Many investors buy bonds to hold them rather than to trade them, so the market for a particular bond, or a small position in a bond, may not be especially liquid and quoted prices for the same bond may differ. Securities are classified as high yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below.
© 2019 Oppenheimer Asset Management Inc. This commentary is intended for informational purposes only. The information and statistical data contained herein have been obtained from sources we believe to be reliable. Oppenheimer Investment Advisers (OIA) is a division of Oppenheimer Asset Management Inc. The opinions expressed are those of Oppenheimer Asset Management Inc. (“OAM”) and its affiliates and are subject to change without notice. No part of this presentation may be reproduced in any manner without the written permission of OAM or any of its affiliates. Any securities discussed should not be construed as a recommendation to buy or sell and there is no guarantee that these securities will be held for a client’s account nor should it be assumed that they were or will be profitable. Past performance does not guarantee future comparable results
Special Risks of Fixed Income Securities: There is a risk that the price of these securities will go down as interest rates rise. Another risk of fixed income securities is credit risk, which is the risk that an issuer of a bond will not be able to make principal and interest payments on time. Neither OAM nor its affiliates offer tax advice. OAM is a wholly owned subsidiary of Oppenheimer Holdings Inc. which also wholly owns Oppenheimer & Co. Inc. (“Oppenheimer”), a registered broker/dealer and investment adviser. Securities are offered through Oppenheimer and will not be insured by the FDIC or other similar deposit insurance, will not be deposits or other obligations of Oppenheimer or guaranteed by any bank or other financial institution, will not be endorsed or guaranteed by Oppenheimer and will be subject to investment risks, including the possible loss of principle invested. 2470474.1