Pacific Funds, september 2018

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

As expected, the Federal Open Market Committee (FOMC) raised the federal funds target rate range by 25 basis points to 2.00-2.25% (one basis point is equal to 0.01%). There were very few language changes relative to the August statement.  There was, however, a notable removal of verbiage pertaining to policy accommodation. In addition to the rate hike, the Committee also released economic projections and “dot plots.”  Our brief thoughts and language changes are noted below.

  • The FOMC raised the range for the federal funds target rate to between 2.00% and 2.25%.
  • The sentence, "The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation" was removed.
  • Otherwise, language changes in the September statement were de minimis.
  • Expectations are for one more rate hike in 2018, three more in 2019, and one more in 2020.
  • Median expectations now suggest an end-of-year target rate of 2.375% for 2018, 3.125% in 2019, 3.375% in 2020, and 3.00% for the longer run.
  • Economic projections were generally revised higher, with real gross domestic product (GDP) revised modestly higher by 0.3% to 3.1% in 2018, by 0.1% to 2.5% in 2019, and unchanged at 2.0% in 2020 and 1.8% for the longer run.
  • The core personal consumption expenditures (PCE) price index for inflation was maintained at 2.1% for 2018, and decreased modestly to 2.0% for 2019.
  • Federal funds futures, as forecast by Bloomberg, currently show a 77% chance of an interest-rate hike to be announced in the December 2018 meeting.1
 
Press Conference

Again, markets appeared to take the Committee’s decision and Chairman Powell’s comments in stride. When asked in the press conference about removing the language pertaining to policy accommodation, Jerome Powell responded, ". . . think the point with accommodative was that its useful life was over. You know, we put that in the statement in 2015, just when we lifted off, and the idea was to provide assurance that we weren't trying to slow down the economy." Questions pertaining to Fed independence and tariffs were also asked, to which Chairman Powell addressed in a manner that suggested the Fed remained independent and lower end tariffs would be a good outcome.  Regarding inflation, he stated “It’s a concern. It’s a risk . . .You don’t see it yet, but you could see retail prices moving up. The tariffs might provide a basis for companies to raise prices in a world where they’ve been very reluctant to and unable to raise prices . . . we don’t see it in the numbers. And, you know, until we see it in the numbers, it’s hard to say how one would react.”

Overall, this rate hike passed with little reaction from the markets as both equity and bond markets priced the increase into current valuations. The next meeting is scheduled for November 7-8, 2018.

 

1Bloomberg Finance L.P., 9/27/18.


Definitions

Core personal consumption expenditures (PCE) price index is the Fed’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.

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.


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 at Pacific Asset Management as of September 27, 2018, are based on current market conditions, and are subject to change without notice. These views represent the opinions of the portfolio managers 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.