Pacific Funds, November 2016
Pacific Funds portfolio managers discuss key points from the Federal Reserve Board’s Federal Open Market Committee (FOMC) November 2016 press release.
Pacific Asset Management, manager of Pacific FundsSM Fixed-Income Funds
As expected, the FOMC left the target rate unchanged in the November meeting. There were no projection materials and no press conference following this meeting. We believe the market response was muted as election uncertainty is dominating at this time. Below are some of our notes:
- The Committee decided to maintain the target rate range at 0.25% to 0.50%.
- Language changes (shown in italics below) were minor when compared to the September 2016 meeting notes, though the changes were skewed to the hawkish side, setting up a probable December rate hike:
- November – Household spending has been rising moderately, versus September – Housing spending has been growing strongly [a slightly dovish change]
- November – Inflation has increased somewhat since earlier this year versus September – Inflation has continued to run below the Committee’s longer-run objective [a hawkish change]
- November – Market-based measures of inflation compensation have moved up [this is new language that we consider net hawkish]
- November – The FOMC judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence [a hawkish change]
- Members were less divided as there were only two dissenting votes in favor of a rate hike by committee members Esther L. George and Loretta J. Mester. Eric Rosengren, who voted for a rate hike in September, voted to maintain the target rate in November.
- At this point in time, the primary obstacle to an interest-rate hike in December would be a surprising outcome of the election.
- The next meeting is scheduled the week of December 13, which will include a Summary of Economic Projections and a press conference by Federal Reserve Board Chair Janet L. Yellen.
Markets currently view the Republican Party presidential candidate as more uncertain; thus, risk assets and fed funds futures probabilities appear to be trading opposite to GOP presidential poll numbers for the time being. The probability of a December rate hike currently sits at approximately 76% according to fed funds futures, and will most likely move higher if the election results are in-line with current market expectations.
Hawkish refers to an indication the Federal Reserve may raise interest rates.
Dovish refers an indication the Federal Reserve may lower interest rates.
This commentary reflects the views of the portfolio managers through 11/4/2016. Pacific Asset Management's views are subject to change as market and other conditions warrant. No forecasts are guaranteed. This commentary is provided for informational purposes only and is not an endorsement of any security, mutual fund, sector or index. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
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Pacific Life Fund Advisors LLC (PLFA), a wholly owned subsidiary of Pacific Life Insurance Company, is the investment adviser to Pacific Funds. PLFA also does business under the name Pacific Asset Management and manages certain portfolios under that name.
Mutual funds are offered by Pacific Funds (Newport Beach, CA). Pacific Funds refers to Pacific Funds Series Trust.
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