Learning What Patience Means
Since the start of the year the U.S. Federal Reserve (Fed) has been outspoken about their shift in policy to being “data dependent and patient.” The market understood the former but was unclear about the latter, and many economists kept one to two rate hikes in their forecasts for this year. The results of March’s FOMC meeting provided needed clarity that “patience” means no rate hikes in 2019 and possibly one hike at an undetermined time in 2020.
We believe the policy outlook for 2020 is signaling a “glass-half-full” outlook. Effectively, the Fed was as dovish as they could be today without spooking the market into thinking the Fed is forecasting the end of the economic cycle. To the contrary, they are trying to extend the cycle.
Key FOMC Meeting Take-aways:
Our investment conclusion is that interest rates are likely to stay low and in a range, which is good for carry oriented strategies and risky assets. An extension of the economic cycle, along with lower interest rates makes it easier for corporations to delever. As a result, credit default risks should fall, thus supportive of credit products.
However, if the Fed’s policy is successful, then there is a lower limit on how far longer-term yields will fall. This is because inflation expectations should increase and steepen the yield curve, despite the current flattening today. This may be a second half of 2019 story.
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