30 Mar Fixed Income Perspectives
Voya Investment Management – Fixed Income Perspectives – March 2015
Punxsutawney Phil won’t be adding “economic soothsayer” to his resume this year. The prescient marmot saw his shadow on Groundhog Day, which typically prognosticates six more weeks of winter. But if the latest U.S. Federal Reserve announcement was any barometer of the economic climate, it would be superstitious to believe in a spring of interest rates anytime soon.
While the improving labor market points to sunnier days ahead, the Fed’s dovish tone confirms that job growth is being overshadowed by the realities of low wage inflation, a strong dollar and collapsing oil prices. And though snowy weather was partially to blame for housing starts falling in February, the decline was the largest in four years — evidence that the housing market is cooling off.
The removal of “patient” from the Fed’s latest announcement implies a shift in policy could happen in 2015. But with forward guidance gone and the emphasis squarely on the economy the message is clear: the Fed will not be impatient about raising rates. Job growth alone likely isn’t enough to offset the weak global growth forecast. On the other hand, a weaker euro and quantitative easing by the European Central Bank are reviving growth prospects in Europe. Keeping Fed policy on hold allows more time for U.S. labor market improvement to percolate into other areas of the economy. Low commodity prices and a strong dollar restrain inflation and are also positive tailwinds for consumers.