Yesterday's FOMC Decision

As it was no surprise to anyone, the FOMC maintained interest rates yesterday. The two notable points I took away were:

• The committee’s projections would indicate they expect the fed fund rates to remain in the 0%-0.25% through 2022.
• The Fed said they would continue QE asset purchases of Treasuries and Mortgages at levels that are at least that of the current pace.

As it relates to the FOMC projecting the Fed Funds rate at 0% for the next 2 ½ years, that’s not entirely surprising, but it is a statement. When it comes to the FOMC member’s projections, I can’t help but think back to a lunch event I went to in 2015 where St. Louis Fed President James Bullard spoke. His entire presentation was on how the Fed’s success in forecasting forward economic conditions was no better than the average Wall Street economist. His message was don’t put too much weight into the Fed’s forecasts. Nevertheless, the market is going to embed the current outlook into expectations. So we are looking at asset prices incorporating a lower for longer environment.

The wording of the second point around QE surprised me a bit. Fixed Income markets are functioning quite well of late and I would argue the Fed does not need to be as active in the market. I suspect the reasoning for potentially increasing the pace of asset purchases is due to the significant amount of Treasury debt still left to be auctioned. I’m sure the Fed is being prepared to be as active as necessary in order to absorb whatever volume of Treasury bonds are needed to keep rates stable. They may also be more worried about main street economic conditions than the market is and want to ensure liquidity remains fluid.

Markets shifted around a bit after the Fed’s announcement with longer duration equities (namely growth oriented Tech stocks) up strongly, with Financials and energy lagging fairly significantly. Treasury yields also fell a bit and it wouldn’t be unusual to see the short end of the curve fall a bit further given the outlook.