Pacific Funds, November 2017
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 1.00%–1.25%, and to continue its process of balance-sheet normalization, which began in October. This information was expected by the markets and language changes to the written comments from the Committee were minimal. There is an 88% probability of a December hike priced into the markets.1 Below are some of our notes:
- The FOMC maintained the range for the federal funds target rate at between 1.00% and 1.25%.
- Language changes in the November press release (shown in italics) were minimal:
- Economic activity has been rising at a solid rate despite hurricane-related disruptions, versus moderately so far this year.
- Although the hurricanes caused a drop in payroll employment in September, the unemployment rate declined further, versus Job gains have remained solid in recent months, and the unemployment rate has stayed low.
- Language added
- Gasoline prices rose in the aftermath of the hurricanes, boosting overall inflation in September; however, inflation for items other than food and energy remained soft.
- Hurricane-related disruptions and rebuilding will continue to affect economic activity, employment, and inflation in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term.
- The balance sheet normalization program initiated in October 2017 is proceeding, versus the Committee will initiate the balance sheet normalization program.
- Federal funds futures, as forecast by Bloomberg, currently show an 88% chance of an interest-rate hike to be announced during the December 2017 meeting, which is higher than the 62% chance following the September meeting.1
Fed Governor Jerome Powell was nominated the next Federal Reserve (Fed) chairman today. Below are some brief notes on his candidacy:
- Powell has been a member of the Fed board since 2012, filling an expiring term and then reappointed in 2014 to a full term ending in 2028.
- Powell is seen to provide a high degree of continuity to current policy, which means the Powell announcement should be taken in stride by markets.
- While monetary policy is not expected to shift much from that under Federal Reserve Board Chair Janet Yellen, regulatory reform has the potential to change. Powell is on record as being open to winding down financial rules implemented after the 2008 financial crisis, which moves closer to the current administration’s views versus Yellen’s views. This change includes capital requirements for banks. Powell previously urged Congress to rewrite the Volcker Rule.
- Powell is considered a moderate on monetary and economic policies.
- Powell is the first Fed chair without a doctorate since 1981, as well as the first Fed Chair with an investment-banking background.
- Powell is seen as a consensus builder and someone who will provide little disruption to the economy.
- Earlier this year, he gave a speech on supply-side economics and handled the 45 minutes of Q&A about current monetary policy and economic conditions very well. This is seen as a good indication for how he would communicate policy to markets and handle Q&A on policy.
- Market consensus is still calling for three hikes next year, which is the same as before Powell was nominated Fed Chair.
- Most likely, the nominee for Vice-Chair of the board will be announced separately from the Chair. The current frontrunner for Vice-Chair is Taylor.
- After the Fed Chair and Vice-Chair, there will be two open spots on the Fed Board of Governors remaining to be filled. Including already confirmed Randy Quarles, who was confirmed by the Senate in October, the current administration has a chance to nominate five of the seven Fed governors by early next year.
Markets have again shown little reaction to the interest-rate decision, which was largely priced in. While we have a favorable view of fundamentals and technical conditions, optimistic market sentiment toward fiscal reform also leads to an underweight in risk. However, we believe that positive trends in U.S. corporate revenue and earnings remain supportive of credit. As a result, our outlook for credit remains constructive.
1Bloomberg Finance L.P., November 1, 2017.
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 November 2, 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.
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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.
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.
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