On September 17, 2015 a much anticipated Federal Reserve meeting ended and the decision on interest rates has several implications for the financial markets.
Going into the meeting I anticipated 1 of 2 outcomes:
- The Fed would raise short-term interest rates for the 1sttime in over 7 years and their statement announcing the change would be “dovish” in nature.
- The Fed would not raise interest rates and their statement announcing why would be “hawkish” in nature.
What happened was a combination of the 2 – the Fed chose to not raise interest rates but their statement was “dovish” in nature.
(a “dovish” statement = lower interest rates for longer, while a “hawkish” statement would indicate higher interest rates sooner)
They gave 2 primary reasons why they did not increase rates – “In light of the heightened uncertainties abroad and the slightly softer expected path for inflation, the committee judged it appropriate to wait for more evidence, including some further improvement in the labor market, to bolster its confidence that inflation will rise to 2 percent in the medium term,” Chairwomen Yellen said. (CNBC)
While the Fed indicated that they could still raise interest rates later this year (they meet again in October and December), the odds have risen that they will not raise rates until 2016.
Financial markets deal with many factors – corporate earnings, economic outlook, interest rates, etc.. The thing the financial markets hate the most is uncertainty. Unfortunately, the Fed decision on interest rates and statement on their outlook only prolongs the uncertainty of when they will raise rates.
My expectation is that the equity markets will remain volatile, with a distinct possibility of retesting the lows hit back on August 24, 2015, at least until early October 2015. That is when 3rd quarter 2015 corporate earnings season begins. The bond market will benefit from this volatility as money flows out of equities and into the relative safety of fixed income investments.
Oh by the way, the U.S. fiscal year ends on 9/30/15 and as it stands now the federal government will shut down unless Congress approves funding for next year – stay tuned!
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