A Dovish Spring

The portfolio managers of Pacific Funds Fixed-Income Funds share their perspectives on the most recent Federal Open Market Committee meeting.

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As expected, the Federal Open Market Committee (FOMC) kept the target rate range for the federal funds at 2.25–2.50%. In addition to leaving rates unchanged, Federal Reserve (Fed) officials signaled rates would most likely remain in this range for the near-term. The Fed also provided more detail regarding the balance sheet run-off, indicating a reduction beginning in May 2019, with a pause after September 2019. While the rate decision was expected, forward rate indications and balance sheet plans were more dovish than most forecasts. Economic projections were also revised slightly lower, unemployment slightly higher, and overall inflation revised slightly lower. These forecasts are consistent with a more dovish tone.

Our brief thoughts about the language changes are noted below.

  • Language changes were minor, but indicated slower growth and lower inflation

Meeting Minutes to be released April 10, 2019.

Rate Hike Forecasts

  • Median expectations are for no hikes in 2019 and one in 2020.
  • Median expectations are for no hikes in 2019 and one in 2020.
  • This forecast shows change in the Fed’s stance from January regarding rate increases in 2019, moving from two to none in the coming year.
  • According to the “dot plots”, 11 officials expect no change to rates, four expect one hike, two expect two hikes.
  • Median expectations now suggest an end-of-year target rate of 2.375% for 2019, 2.625% for 2020, 2.625% for 2021, and 2.750% for the longer run.

Economic Projections

  • Economic projections were generally revised lower, with real gross domestic product (GDP) revised modestly lower by 0.2% to 2.1% in 2019, 0.1% to 1.9% in 2020, and unchanged at 1.8% in 2021; the longer-run projection held steady at 1.9%.
  • The core personal consumption expenditures (PCE) price index for inflation was lowered for both 2019 and 2020 by 0.1% to 1.8% and 2.0%, respectively.

Balance Sheet Run-Off

  • The Fed plans to slow the reduction of Treasury holdings by reducing the cap on monthly redemptions from the current level of $30 billion to $15 billion beginning in May 2019.
  • The FOMC intends to conclude the reduction of its aggregate securities holdings in the System Open Market Account at the end of September 2019.
  • Beginning in October 2019, principal payments received from non-Treasury securities will be reinvested in Treasuries up to a maximum of $20 billion per month.

Federal Reserve Chairman Jerome H. Powell’s third press conference of the year reiterated the Fed’s dovish stance regarding potential policy action going forward. Treasury yields saw sharp declines after the Fed’s decision, with the 10-year Treasury finishing the day at 2.53%. With Chairman Powell mentioning the Fed wants to be, "transparent, predictable, and gradual in order to minimize disruptions and risks to our dual mandate,” paired with his statement that, “the data is not sending a signal to move in one direction or another,” reiterates and supports the Fed’s “watch-and-wait” position. It was also stated that the slowing in growth is believed to be transitory and that inflation continues to bounce close to the Fed’s 2% target; however, not sustaining this level for a prolonged period adds to the case that patience may be necessary in the Fed’s eyes as they continue to take into account a wide range of information, which includes: labor-market conditions, indicators of inflation pressures, and inflation expectations, as well as readings on financial and international developments.

Given the Fed’s position on data dependency and the anticipation of no rate hikes in 2019, market participants are now balancing the actions of the Fed, which are supportive to risk assets, against the reasons for the Fed’s stance, which would indicate a broader weakness to global growth than some expected. Currently, Fed futures are suggesting a 0% probability of a rate hike and 98% probability of no change at the FOMC’s next meeting, which is scheduled for April 30-May 1, 2019.(1)

(1) Bloomberg Finance L.P., 3/20/19.

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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.

Dovish refers to an indication the Fed may lower interest rates.

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 March 21, 2019, 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.

Bloomberg Finance L.P. is unaffiliated with Pacific Life Insurance Company, Pacific Funds, their affiliates, their distributors, and representatives.

Pacific Life Fund Advisors LLC (PLFA), a wholly-owned subsidiary of Pacific Life, is the investment adviser to Pacific Funds. PLFA also does business under the name Pacific Asset Management and manages certain funds under that name.

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