Pacific Funds, december 2016
Pacific Asset Management, manager of Pacific FundsSM Fixed-Income Funds
As expected, the Federal Open Market Committee voted unanimously to raise the range for the federal funds target rate by a quarter of a percentage point (0.25%) in the December meeting. In addition, there were revisions to the “dot plot” and economic projections for gross domestic product (GDP), unemployment rate, and inflation. Below are some of our notes:
- The Committee decided to increase the range for the target rate to between 0.50% and 0.75%.
- Language changes from the November meeting were minimal, but important (shown in italics), and came in the first and third paragraphs of the written comments from the Committee:
- In December, economic activity was expanding at a moderate pace, versus a modest pace in November.
- In December, the unemployment rate has declined, versus November where it was little changed.
- In December, the language around the Committee decision to increase the rate cited realized and expected labor market conditions and inflation as the reason for the movement, versus November where they decided to wait for some further evidence of continued progress towards its objectives.
- For the first time this year, the dot plots were revised higher, pricing in a total of three rate hikes during each of the next three years.
- Real GDP was revised higher for 2016, 2017, and 2019, and was unchanged for 2018.
- Federal fund futures, as forecast via Bloomberg, show a 17% chance of a rate hike to be announced in the January 2017 meeting.1
While this is only the second time in the last decade that the U.S. central bank has raised the target rates, this appears to signal the beginning of a cycle for interest-rate hikes; the prior rate hike was in December 2015. Markets widely expected the rate increase at this meeting in light of a falling unemployment rate and rising wages. Two important notes were that the dot plots were revised higher for the first time this year, and the central tendency was increased to reflect three rate hikes in 2017, from two. Markets seem to have altered direction on inflation expectations, potentially due to election-related expectations including fiscal stimulus, deregulation of business, and a potential for higher government deficits. Following the release of economic projections and the rate decision, bond yields rose on the prospect of an increased pace of interest-rate increases in 2017. Finally, in her press conference, Federal Reserve Board Chair Janet Yellen stated that she intends to serve her full term through January 3, 2018, which the market views net-favorable as it reduces uncertainty.
1Bloomberg Finance L.P. December 14, 2016.
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.
The central tendency is a narrower version of the range of dot plots that excludes the three highest and three lowest projections for each variable in each year or period.
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 December 15, 2016, 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. No forecasts are guaranteed. All material is 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 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.
No bank guarantee. May lose value. Not FDIC insured.