Breaking down the Federal Reserve Statement

Written by: Ryan Bouchey

 
Another Federal Reserve meeting without a change to the federal funds rate has left investors with more questions than answers and led to a brief sell off in the equity markets. Through the end of day Thursday and into the futures market on Friday morning, all U.S. indices have declined. Let’s explore the reasoning for the Fed’s dovish stance as well as what investors should be aware of moving forward.

 
Why did the Fed leave short-term rates unchanged?
• Janet Yellen has proven to be an extremely cautious leader of the Federal Reserve. She had a reputation as being dovish when it came to monetary policy and I believe she wants to be absolutely certain when she makes the final decision to begin increasing rates.

 

• Global uncertainty was a large part of the Fed’s decision making process. Even though China plays a small role in U.S. GDP, Yellen cited Chinese economic performance amidst her concerns of raising rates too soon.

 

• Over the past six years, central banks in other developed countries have raised rates only to see their economies falter and then the banks have had to reverse course and lower rates to try to stimulate their economies. Based on concerns with the current global economy, the Fed didn’t want to risk having this outcome.

 
• Inflation has remained low. One of the Fed’s mandates is to keep inflation at a target rate of approximately 2%. As inflation rises, the Fed will raise interest rates to keep inflation in check. We have continued to see inflation numbers below 2%, meaning the Federal Reserve sees no reason to raise rates in their attempt to slow inflation down.

 
I believe we are finally seeing the tides turn for investors. Throughout the past few years investors treated the potential for a rise in interest rates as a bad thing, fearing that an increase to the federal funds rate would hurt the market. It seems as though we have gotten past this narrative and investors are tired of the uncertainty of when the Fed will raise rates and now view a rise in interest rates as a good thing for the markets.

 
We have held on to the opinion that raising rates will be good for both the stock market and our economy. The longer the Fed waits the more uncertainty we will see which could lead to some volatility. Overall, any volatility from the Fed’s decision should be short term in nature as we continue to see positive data coming from the U.S. economy, fundamentals still show equities at fair values. This is certainly not a time to panic and we will continue to monitor the Fed’s discussions moving forward as they have two more meetings left for 2015 – one in October and one final meeting in December.