The Fed’s Decision: Steady Rates Today – But Lower Down the Road?
Nick Maroutsos, Co-Head of Global Bonds, discusses the Federal Reserve’s decision today to keep rates steady and why the central bank’s next move could be a rate cut.
- With inflationary pressure largely absent, the Federal Reserve (Fed) kept the range of its benchmark lending rate between 2.25% and 2.5%
- This is yet another step in increasing accommodation by global central banks, a process started by the Fed with its winter pivot and since followed by countries concerned about stalling growth.
- While we do not see a recession – and consider the low-growth environment favorable to both bonds and riskier assets – we believe fixed income investors should remain cautious, focusing on steady income streams and capital preservation.
Today the Federal Reserve (Fed) reiterated its “patient” approach toward monetary policy, announcing that it will maintain its benchmark overnight lending rate in the range of 2.25% to 2.50%. In its statement, the central bank cited inflation running below its 2.0% target in recent months, which, in our view, gives them the latitude to keep rates steady. Officials balanced this opinion with comments on the strong labor market and solid domestic economic growth, despite slowing personal consumption and business investment in the first quarter. The central bank also referenced global economic developments, which remain muted, as a factor in its decision.
Our view remains that the Fed will keep interest rates on hold for the balance of 2019, and it is our expectation that the central bank’s next move will be to cut rates. Since the Fed’s policy pivot, we’ve seen a flood of dovishness from many other central banks as they follow the lead of the U.S. in creating a more accommodative environment. These newly dovish central banks include Sweden’s Riksbank, the Bank of Canada, the Reserve Bank of Australia and the Reserve Bank of New Zealand.
Implicit in this shift toward looser monetary policy are concerns about slowing economic growth. We, however, do not foresee a global recession as we believe the global economy will do relatively well now that central banks have eased off the gas pedal; however, we do expect a slow-growth environment, which should benefit both bonds and riskier assets, including corporate credit and equities.
We expect the U.S. Treasuries curve to steepen, led by decreasing yields on shorter-dated maturities, as the market prices in Fed rate cuts. However, we do not expect those rate cuts to come to fruition until 2020.
The Fed’s dovish messaging has caught on like wildfire, and markets are pricing in rate cuts globally much sooner than is likely. In this regard, we think the market’s getting ahead of itself.
One shouldn’t attempt to be a hero in this environment. Potentially sizable, Fed-induced capital appreciation may be enticing, but bond investors would be better served by focusing on income generation and capital preservation.