Pacific Funds, january 2020

The Fed’s stance barely changed from its previous meeting, though low inflation continues to be a concern.

Informational commentary from Pacific Asset Management, subadviser of Pacific FundsSM Fixed-Income Funds.

Did the Fed’s Rate Cut Satisfy Investors’ Sweet Tooth for More Easing?

Key Points:

  • As expected, the Federal Open Market Committee held the federal funds target-rate range at 1.50%–1.75%
  • The only language change to the Fed’s previous statement pertained to household spending rising at a “moderate pace” instead of a “strong pace.”
  • The Fed tweaked the interest it pays on reserves from 1.55% to 1.60%. 

 

At its January meeting, the Federal Open Market Committee (FOMC) unanimously voted to hold the federal funds target-rate range at 1.50%–1.75%. The policy announcement contained no surprises; in fact, the FOMC changed only a few words from its Dec. 11 statement (see below). 

 

January 29, 2020 Statement December 11, 2019 Statement
“Although household spending has been rising at a moderate pace …”
“Although household spending has been rising at a a strong pace …”

 

Interest on required and excess reserves moved from 1.55% to 1.60%. This minor tweak was intended to nudge the target rate toward the middle of the rate range.

In his remarks, Chair Jerome Powell noted that “monetary policy is well positioned to … a return of inflation to our symmetric 2 percent goal.” This was a slight change from the chair’s December comments when he stated that the Federal Reserve (Fed) policy will support inflation “near our symmetric 2 percent objective.” Powell also stated that the Fed “wanted to send a clearer signal that we’re not comfortable with inflation … running persistently below our 2 percent symmetric objective.” We believe this represents a higher inflation hurdle for the Fed to increase the target rate. While the Fed has indicated it felt comfortable with current interest rates, a default expectation would be for the next Federal Reserve move to cut rates in an effort to keep inflation at or below 2%. The table below shows rate-cut probabilities for the remainder of 2020, according to Bloomberg.

 

hold-firm-chart-1

In general, the Fed continues to remain accommodative through balance-sheet expansion, repo-market intervention, and stronger commitment to raise inflation. For the Fed’s next meeting on March 18, current odds for a hike are 0%, with a 16% chance of a rate cut1.

1Source: Bloomberg Finance L.P., 1/29/20. 


Disclosures

This publication is provided by Pacific Funds. Pacific Funds refers to Pacific Funds Series Trust. This commentary reflects the views of the portfolio managers at Pacific Asset Management as of January 30, 2020, are based on current market conditions, and are subject to change without notice. These views represent the opinions of the portfolio managers and are presented for informational purposes only. These views should not be construed as investment advice, an endorsement of any security, mutual fund, sector, or index, the offer or sale of any investment, or to predict performance of any investment. Any forward-looking statements are not guaranteed. All materials are compiled from sources believed to be reliable, but accuracy cannot be guaranteed.

All investing involves risk, including the possible loss of the principal amount invested.

Pacific Life Insurance Company is the administrator for Pacific Funds. It is not a fiduciary and therefore does not give advice or make recommendations regarding insurance or investment products.

Bloomberg Finance L.P. is unaffiliated with Pacific Life Insurance Company, Pacific Funds, their affiliates, their distributors, and representatives.

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