Pacific Funds, January 2018

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

As expected, the Federal Open Market Committee (FOMC) voted unanimously to maintain the target range for the federal funds rate at 1.25%–1.50%, amid largely positive labor-market data, a weaker U.S. dollar, and the passage of domestic tax reform. The Federal Reserve (Fed) also continued its process of balance-sheet normalization, which began in October 2017. There were very few changes to the language in its statement. The market currently expects the next rate hike in March. Below are some notes of the changes from this meeting’s statement:

  • The FOMC maintained the range for the federal funds target rate between 1.25% and 1.50%.
  • Language changes in the January statement (shown in italics) were minimal, and consistent with further rate hikes: 
    • Gains in employment, household spending, and business fixed investment have been solid, and the unemployment rate has stayed low. This statement was changed from a statement related to the hurricanes made in December.
    • The committee expects that economic conditions will evolve in a manner that will warrant further gradual increases. “Further” was added in January.
  • Federal funds futures, as forecast by Bloomberg, currently show a 99% chance of an interest-rate hike to be announced in the March 2018 meeting.1
  • The composition of voting members changed at this meeting with Chicago Fed President Evans, Philadelphia Fed President Harker, Dallas Fed President Kaplan, and Minneapolis President Kashkari being replaced by Cleveland Fed President Mester, Richmond interim Fed President Mullinix, Atlanta Fed President Bostic, and San Francisco Fed President Williams. 
  • Voting for the FOMC monetary policy action were Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Loretta J. Mester; Jerome H. Powell; Randal K. Quarles; and John C. Williams.
  • This is Janet Yellen’s last meeting as Fed Chair before her term ends, at which time Governor Powell is scheduled to be sworn in. The next policy announcement is scheduled for 3/21/18 and will include projections, including dot plots and a press conference. 

Market Response

Market reaction has been relatively muted as this decision was in line with market expectations. Risk assets moved higher, despite comments from both the Fed and European Central Bank (ECB) on less accommodation, as a strong fundamental and earnings outlook provides the backdrop. Longer-term U.S. Treasury rates have climbed over 30 basis points (one basis point equals 0.01%) during the first month of 2018, but have not seemed to be a problem for risk assets…yet. We will see if this is sustainable, as at some point, higher rates should widen risk premiums. 

 

1Bloomberg Finance L.P., 1/31/18.


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 as of January 31, 2018, are based on current market conditions, and are subject to change without notice. These views represent the opinions of the portfolio managers at Pacific Asset Management 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.

PLFA3

Pacific Life Fund Advisors LLC (PLFA), a wholly owned subsidiary of Pacific Life Insurance Company, is the investment adviser to the Pacific Funds. PLFA also does business under the name Pacific Asset Management and manages certain funds under that name.

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