What does Fed rate inaction mean?
The Northwestern Mutual Wealth Management Company – Vail Valley
The latest moment of truth –when the Federal Reserve would again decide whether or not to raise its benchmark rate for the first time since 2006 — finally arrived Sept. 17, and investors were apparently concerned about the verdict.
The Fed decided not to act, but after a brief rally on the news, stocks fell far enough over the next two days to finish down for the week despite a strong midweek rally. The bond market was also impacted, and the yield on the two-year Treasury had its largest one-day dip since December 2010.
There’s long been anxiety about what the beginning of the end of the “easy money” era would mean, but in this case investors seemed to be disappointed — either because they now think the hike is overdue or because the Fed’s decision indicated that the global economy is more fragile than first thought. A rate hike, in contrast, would be seen as a sign of confidence in the United States economy. The media was equally split on the decision, with an editorial in The Wall Street Journal opining, “The question now is whether the Fed will ever raise rates before the next recession,” while an editorial in The New York Times concluded, “By holding steady, the Fed is acknowledging, correctly, that the economy shows no signs of overheating.”
At her post-meeting press conference, the Fed’s Chairwoman Janet Yellen said, “The recovery from the Great Recession has advanced sufficiently far and domestic spending has been sufficiently robust that an argument can be made for a rise in interest rates at this time,” but she added that “heightened uncertainties abroad,” induced the Fed to hold off. “In light of the development that we have seen and the impacts on financial markets, we want to take little more time to evaluate the likely impacts on the United States,” she added. Yellen also indicated that the Fed would not wait for inflation to hit 2 percent because leaving the rate at near zero had “an extreme downside risk that in no way is near the center of my outlook.” Thirteen of 17 voting members still expect a hike in 2015, but 15 felt that way in June. Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, voted to raise the rate, the first voting member to do so this year. The Fed has two more meetings in 2015, in October and December.
The latest from China
The news at the beginning of the week did nothing to dispel the prospect of a global slowdown, as China reported that fixed-asset investment grew 10.9 percent from a year earlier through the first eight months of the year, short of the forecast of 11.5 percent, and factory output was up 6.1 percent in August from a year ago; analysts had forecast a gain of 6.4 percent.
Another showdown in Washington
The federal government still doesn’t have a budget for the fiscal year that begins on Oct. 1 and, based on last week, the negotiations may once again go down to the wire – or beyond. The latest sticking point is the vote by House republicans to defund Planned Parenthood, a step that will not survive the Senate or a presidential veto, but that nonetheless makes an already partisan process that much thornier.
Another election in Greece
Greeks went to the polls on Sunday to choose a new government, and Alexis Tsipras will not only return as prime minister but appears to have enough seats in parliament to form a ruling coalition. Tsipras stepped down and called the elections after he fell out with his fellow Syriza Party members over the terms of his nation’s latest bailout package, and there was concern that if he wasn’t reelected Greece might not follow through on the terms of the deal.
Eurozone inflation remains sluggish
Inflation in the eurozone slowed to 0.1 percent in August, its lowest level in four months, adding to the challenges facing the European Central Bank in its efforts to revive price growth in the region.
Retail sales rise, manufacturing falls
In other economic news, retail sales rose 0.2 percent in August after a 0.7 percent gain in July; sales were up 2.2 percent over the 12 months ending in August. Core sales, less food and gas, increased 0.4 percent. Because of a cutback in automobile production, which dropped 6.4 percent (and which had jumped 10.6 percent in July), manufacturing fell 0.5 percent in August, the biggest dip since January 2014. Overall, industrial production was off 0.4 percent, and capacity utilization dropped 0.4 percent to 77.6 percent. Business inventories increased 0.1 percent in August, the smallest gain since March. And consumer prices fell 0.1 percent, the first decrease since January, mainly because the price of gas tumbled 4.1 percent. In the 12 months through August, the Consumer Price Index (CPI) rose 0.2 percent. Core CPI was up 0.1 percent for the month and 1.8 percent for the previous year. The net worth of Americans reached a new peak in the second quarter, rising $695 billion to $85.7 trillion, mainly because of higher property values. First-time jobless claims fell 11,000 to 264,000 and have now been below 300,000 for six months, which hasn’t happened since 1973. Housing starts dipped 3 percent in August to 1.13 million, though they were up 16.6 percent from August 2014. Building permits increased 3.5 percent to an annual rate of 1.2 million, 12.5 percent higher than a year ago. Lastly, the Conference Board’s index of leading indicators improved 0.1 percent after having been flat in July. .
Around the eurozone
The euro-area economy grew more than first reported in the second quarter, driven by exports and consumer spending, with GDP up 0.4 percent compared to the original estimate of 0.3 percent. In a statement that will conciliate Germany but may agitate member nations already concerned about the sway of the European Central Bank, it offered further details about the Single Supervisory Mechanism designed to oversee banks and manage bank failures, saying it would override national banking rules that conflicted with its policies.
A look ahead
As investors continue to weigh the Fed’s decision – and begin to count the days to its next meeting in October — they’ll also consider the latest releases on new and existing home sales, manufacturing, durable and capital goods orders, personal consumption and the government’s second revision of second-quarter growth, expected to remain in the neighborhood of 3.7 percent.
This commentary was prepared specifically for your wealth management advisers by Northwestern Mutual Wealth Management Company.
The opinions expressed are as of the date stated on this material and are subject to change. There is no guarantee that the forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment or security. Information and opinions are derived from proprietary and non-proprietary sources. Sources may include Bloomberg, Morningstar, FactSet and Standard & Poors.
All investments carry some level of risk including the potential loss of principal invested. Indexes and/or benchmarks are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance and are not indicative of any specific investment. No investment strategy can guarantee a profit or protect against loss. Although stocks have historically outperformed bonds, they also have historically been more volatile. Investors should carefully consider their ability to invest during volatile periods in the market. The securities of small capitalization companies are subject to higher volatility than larger, more established companies and may be less liquid. With fixed income securities, such as bonds, interest rates and bond prices tend to move in opposite directions. When interest rates fall, bond prices typically rise and conversely when interest rates rise, bond prices typically fall. This also holds true for bond mutual funds. High yield bonds and bond funds that invest in high yield bonds present greater credit risk than investment grade bonds. Bond and bond fund investors should carefully consider risks such as: interest rate risk, credit risk, liquidity risk and inflation risk before investing in a particular bond or bond fund.
The Dow Jones Industrial Average Index® is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.
Standard and Poor’s 500 Index® (S&P 500®) is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Standard & Poor’s offers sector indices on the S&P 500 based upon the Global Industry Classification Standard (GICS®). This standard is jointly maintained by Standard & Poor’s and MSCI. Each stock is classified into one of 10 sectors, 24 industry groups, 67 industries and 147 sub-industries according to their largest source of revenue. Standard & Poor’s and MSCI jointly determine all classifications. The 10 sectors are Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Information Technology, Materials, Telecommunication Services and Utilities.
The NASDAQ Composite Index® Stocks traded on the NASDAQ stock market are usually the smaller, more volatile corporations and include many start-up companies.
NASDAQ – National Association of Security Dealers Automated Quotations. The NASDAQ is a computer-operated system owned by the NASD that provides dealers with price quotations for over-the-counter stocks.
The 10-year Treasury Note Rate is the yield on U.S. Government-issued 10-year debt.