Pacific Funds, december 2017
Informational commentary from Pacific Asset Management, manager of Pacific FundsSM Fixed-Income Funds.
As expected, the Federal Open Market Committee (FOMC) voted to increase the target range for the federal funds rate to 1.25%–1.50%, raising the forecast for economic growth in 2018 and marking the end of Janet Yellen’s tenure at the Federal Reserve (Fed). Economic projections were also updated, with median “dot plots” remaining unchanged. The central bank confirmed it would increase the monthly pace of balance-sheet reduction to $20 billion from $10 billion beginning in January 2018. This information had been largely priced in by markets. Below are our notes of the changes from this meeting's statement:
- The FOMC maintained the range for the federal funds target rate at between 1.25% and 1.50%.
- Language changes in the December press release (shown in italics) were minimal:
- Labor market conditions will remain strong, versus strengthen somewhat further.
- The stance of monetary policy remains accommodative, thereby supporting strong (versus some further strengthening) labor market conditions and a sustained return to 2 percent inflation.
- Median dot plots remain unchanged for 2018, reflecting three additional hikes.
- Going forward, median expectations suggest a target rate of 2.125% for 2018, 2.625% in 2019 (two additional hikes), and 2.75% for the longer run.
- Economic projections were mixed, with real gross domestic product (GDP) revised modestly higher by 0.1% to 2.5% in 2017, by 0.4% to 2.5% in 2018, by 0.1% to 2.1% in 2019, and unchanged at 1.8% for the longer run.
- Unemployment rates have been revised downward to 4.1% for 2017, and 3.9% for both 2018 and 2019.
- The core personal consumption expenditures (PCE) price index for inflation was maintained at 1.5% for 2017, 1.9% for 2018, and 2.0% for 2019.
- Federal funds futures, as forecast by Bloomberg, currently show a 69% chance of an interest-rate hike to be announced in the March 2018 meeting.1
- There were two dissenting votes—Minneapolis Federal Reserve President Neel Kashkari and Chicago Federal Reserve President Charles L. Evans—who voted to keep rates unchanged.
- Fed officials didn’t change from their 2018 outlook for either interest rates or inflation.
Markets have shown little reaction to the interest-rate decision, which was priced in. Risk sentiment continues to remain well supported as investors continue searching for yield. While market participants are focused on fiscal policy at this time, we believe that positive trends in U.S. corporate revenue and earnings remain supportive of credit, and thus, our outlook for credit remains constructive.
1Bloomberg Finance L.P., December 14, 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 December 14, 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.
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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