Pacific Funds, March 2017

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

During its March 2017 meeting, the Federal Open Market Committee (FOMC) raised the target range for the federal funds rate by 0.25%, citing the U.S. economy has mostly met the goals of full employment and price stabilization. The FOMC continues to maintain a gradual plan for removal of policy accommodation. Economic projections were also updated, with the median “dot plots” reaffirming the expectation of two additional interest rate hikes during 2017. There were no major revisions to the median estimates for gross domestic product (GDP), unemployment rate, and inflation. Of note were the addition of “symmetric” when describing the inflation goal and the absence of a discussion about balance-sheet tapering, two potentially dovish signals amid the hike. Below are some of our notes:

  • The FOMC decided to increase the range for the federal funds target rate to between 0.75% and 1.00%.
  • Language changes in March (shown in italics) were minor, but important, and came in the first, second, and fourth paragraphs of the written comments from the Committee:
    • Business fixed investment appears to have firmed somewhat, versus has remained soft in January/February [a hawkish change].
    • Inflation has increased in recent quarters, moving close to the Committee’s 2 percent longer-run objective, versus is still below the Committee’s 2 percent longer-run objective in January/February [a hawkish change].
    • Language added was: excluding energy and food prices, inflation was little changed and continued to run somewhat below 2 percent [a dovish addition].
    • Inflation will stabilize around 2 percent, versus will rise to 2 percent [a dovish change].
    • The Committee will carefully monitor actual and expected inflation developments/progress relative to its symmetric inflation goal, versus in light of the current shortfall of inflation from 2 percent in January/February; this change potentially implies it is acceptable for inflation to run slightly above the inflation goal of 2 percent [a dovish change].
    • The word “only” was deleted where economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate, versus will warrant only gradual increases in January/February; this change sets up a possible rate hike of greater than 0.25% in the future [a hawkish change].
  • Median dot plots moved marginally higher for 2017, reaffirming expectations for two more hikes to bring the year-end target to 1.375% for 2017, 2.125% for 2018, and 3.0% for the longer run.
  • Economic projections reflect stronger economic and job growth, with real GDP for 2017 unchanged at 2.1% and 2019 at 1.9%, and a modest increase in expectations for 2018 to 2.1% from 2.0%. Longer-run unemployment was revised modestly lower to 4.7% from 4.8%. Finally, the Core Personal Consumption Expenditures (PCE) price index for inflation was revised higher for the fourth quarter of 2017 to 1.9% from 1.8% and maintained at 2.0% for both 2018 and 2019.
  • Federal funds futures, as forecast by Bloomberg, show a 54% chance of an interest-rate hike to be announced during the June 2017 meeting 1
  • There was only one dissenting vote–Minneapolis Federal Reserve president, Neel Kashkari–who voted to keep rates unchanged.

 

Market response

Despite a well-telegraphed decision, news of the interest-rate hike drove risk assets higher and government-bond yields lower, especially at the long end of the curve, because the hike and accompanying language was more dovish than the market had originally feared. It appears markets were worried the FOMC’s response would be too hawkish, despite the longer-term view that the Committee has been dovish for some time. In the end, the Fed seems to be doing exactly what it said it would, which is imposing gradual increases, but not “glacial” ones, as Federal Reserve Board Chair Janet Yellen has remarked.

We believe the decision will have an impact on individuals with variable interest‐rate debt as well as short-term and institutional investors, but has little implication for long‐term investors. With the monetary policy decision out of the way, we believe the markets will likely refocus on issues in Washington, D.C.

 

1Bloomberg Finance L.P. March 17, 2017.

 


Definitions

Hawkish refers to an indication the Federal Reserve may raise interest rates.

Dovish refers to an indication the Federal Reserve may lower interest rates.

A dot chart or dot plot is a statistical chart consisting of data points plotted on a fairly simple scale used to project the rate path.

Core Personal Consumption Expenditures (PCE) inflation price index is the Federal Reserve’s preferred measure of U.S. inflation, which measures the prices consumers pay for goods and services without the volatility caused by energy and food prices.
 


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 through March 17, 2017, 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.

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 is unaffiliated with Pacific Life Insurance Company, Pacific Funds, their affiliates, their distributors, and representatives.