May 2, 2019
A Strong Neutral
The portfolio managers of Pacific Funds Fixed-Income Funds share their perspectives on the most recent Federal Open Market Committee meeting.
Informational commentary from Pacific Asset Management, manager of Pacific Funds Fixed-Income Funds.
As expected, the Federal Open Market Committee (FOMC) held the federal funds target rate range at 2.25‑2.50%. Federal Reserve (Fed) officials did little to change their stance from the March meeting, signaling that any potential consideration for a rate hike would likely not take place until 2020. While language from the Fed press release could be construed as dovish, Federal Reserve Chairman Jerome H. Powell firmly indicated in the press conference, “the Committee believes that the current stance of policy is appropriate.”
Fed officials did mention that should the data warrant a potential hike, they would consider action if deemed necessary and appropriate. There were very few language changes relative to the March statement (see below).
Other items of note:
- The Board of Governors voted unanimously to set the interest rate paid on required and excess reserve balances at 2.35%, effective May 2, 2019. Setting the interest rate paid on required and excess reserve balances 15 basis points (one basis point equals 0.01%) below the top of the target range for the federal funds rate is intended to foster trading in the fed funds market at rates well within the FOMC’s target range.
- As part of its policy decision, the FOMC voted to authorize and direct the Open Market Desk at the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive:
- “Effective May 2, 2019, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of
- 2¼ to 2½ percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 2.25 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.”
- “Effective May 2, 2019, the Committee directs the Desk to roll over at auction the amount of principal payments from the Federal Reserve’s holdings of Treasury securities maturing during each calendar month that exceeds $15 billion. The Committee directs the Desk to continue reinvesting in agency mortgage-backed securities the amount of principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $20 billion. Small deviations from these amounts for operational reasons are acceptable.”
Markets reversed course after the FOMC press conference as Chairman Powell’s comments, “that there doesn’t appear to be a strong case for a rate move in either direction,” seemed to spoil the dovish narrative that had been priced into markets. Entering the meeting, the implied probability of a rate cut in 2019 was 67.2% according to Fed futures. That probability increased after the press release, then promptly dropped after the press conference to 54%, suggesting the market hoped for a dovish tilt.(1) While softening gross domestic product, lower long-term global yields, and benign inflation could certainly warrant a rate cut, the rally in risk assets, low unemployment, and strong corporate earnings appropriately warrant a neutral position at this time. Until the next meeting, which is scheduled for June 18-19, we will remain “data dependent.”
(1)Bloomberg Finance L.P., 5/1/19.
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 May 1, 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.