February 7, 2019
Just a Little Patience
The portfolio managers of Pacific Funds Fixed-Income Funds share their perspectives on the most recent Federal Open Market Committee meeting.
The Federal Open Market Committee (FOMC) kept the federal funds target rate range at 2.25–2.50%. More importantly, Federal Reserve (Fed) officials held a more dovish posture in their post-January meeting statement, signaling patience regarding ongoing rate hikes and discussing potential adjustments to the balance-sheet runoff. This is markedly different than the tone taken after the December meeting.
The Fed also released a new statement clarifying some of the thinking on its current plan to reduce the size of the balance sheet. It came about after “extensive deliberations and thorough review of experience to date.” The Fed’s new statement tells investors that on the one hand, the balance-sheet runoff matters, but on the other hand, is only a complement to the way the Fed sets policy. There were very few, but impactful, language changes as the Fed added to comments regarding growth and economic conditions. Our brief thoughts and language changes are noted below.
- Regarding inflation, the FOMC expanded on its statement that "Indicators of longer-term inflation expectations are little changed, on balance" to "Although market-based measures of inflation compensation have moved lower in recent months, surveyed-based measures of longer-term inflation expectations are little changed."
- The Fed also removed language regarding "further gradual increases in the target range. . ." replacing it with, "The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the committee’s symmetric 2% objective as the most likely outcomes. In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes."
- Otherwise, language changes in the January statement were minimal.
Federal Reserve Chairman Jerome Powell’s first press conference of the year signaled a more dovish stance regarding potential policy action going forward. With a mention of “common sense suggesting patiently awaiting better clarity” and “the cumulative effects of the last several months warranting a wait and see approach,” investors appeared to take the FOMC statement and Chairman Powell’s press conference positively.
Given the Fed’s position on data dependency, we expect increased volatility around policy paths through the year. Currently, Fed futures are suggesting a 4% probability of a rate hike, and 10% probability of a rate cut by the end of 2019.(1)
The next FOMC meeting is March 19–20, 2019, which is just seven weeks away.
(1) Bloomberg Finance L.P., 2/5/19.
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 February 5, 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.
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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, is the investment adviser to Pacific Funds. PLFA also does business under the name Pacific Asset Management and manages certain funds under that name.