22 Sep Fixed Income Perspectives – ‘All Eyes on the Fed: To Hike or Not to Hike…Is that Really the Question’
Voya Investment Management – Fixed Income Perspectives – September 2016
At the September FOMC meeting, all eyes were once again on the Federal Reserve. The Fed’s announcement to keep rates unchanged, while retaining a bias to hike rates later on in the year, is likely the one that will grab headlines. But is it the most important thing investors need to focus on? We believe it’s not. In our view, the bigger news came in late August at the Fed’s Jackson Hole summit.
At the Jackson Hole Summit Dr. Yellen provided the following insight into how the Fed would react in the event of another recession: “In addition to taking the federal-funds rate back to nearly zero, the FOMC could resume asset purchases and announce its intention to keep the federal-funds rate at this level until conditions had improved markedly.” Dr. Yellen focused on Fed research stating that in a recession the Fed will cut rates from 3% to 0% and buy $2 trillion of assets. This assumes the policy rate can get to 3% before cutting it by 300 basis points, a point that Dr. Yellen also acknowledged, admitting that the Fed can be expected “to have less scope for interest-rate cuts” than it historically has had. The bottom line is that unconventional policy tools are here to stay and the Fed’s future reaction function appears significantly more complex.