Fed’s constructive growth and inflation outlook likely paves the way for further hikes
The US Federal Reserve (the Fed) hiked its benchmark short-term interest rate by 25 basis points today, as expected. The statement was generally neutral, in our view, with upbeat commentary around the current growth backdrop. Inflation commentary was more mixed, stating that headline inflation has moved closer to the Fed’s target, yet emphasizing that core inflation continues to run below the Fed‘s target. Overall, the statement was similar to the January‒February statement, meaning that little has changed to alter the Fed’s view since then.
The Fed also released its widely anticipated Summary of Economic Projections (SEP), which includes the forecast of the federal funds rate or the so-called “dots.” The projected year-end 2017 federal funds rate indicates three rate hikes, unchanged from December’s SEP release, while the bond market had only been pricing in two prior to today’s announcement.1 The longer-run federal funds rate was unchanged at 3.0%. Growth and inflation projections were largely unchanged with only a slight upward revision to 2017 core inflation, from 1.8% to 1.9%.2
In her press conference, Fed Chair Janet Yellen stated that an unchanged SEP is consistent with gradual rate increases over time. The Fed is discussing and monitoring fiscal policy changes but has not yet included potential impacts in its projections. Therefore, federal funds rate projections were left unchanged.
Bond markets likely to absorb rate increase with limited impact, but questions remain on Fed’s economic projections
In its March 14‒15 meetings, the Federal Reserve (Fed) will decide whether to raise interest rates for the third time since it began monetary policy normalization 15 months ago.1 Invesco Fixed Income believes there is a high probability that the Fed will raise its policy rate by 0.25% next week. Fed Chair Janet Yellen and Vice Chair Stanley Fischer have indeed signaled in recent statements that they believe a rate increase is likely to be appropriate. Further monetary tightening has been in the cards for some time; however, the bond markets had not placed a high probability of a March rate hike even a few weeks ago.
What has changed in the last few weeks to cement expectations of a March hike?Continue
Recent events have shown that a strong economic backdrop trumps near-term turmoil
There’s an old adage on Wall Street: “Buy the rumor, sell the fact.” This conveys the idea that markets tend to rise on expectations of a positive event and sell off after the event occurs. In other words, because market expectations often go too far, sentiment can cool quickly once an event actually occurs and investors move on to the next big thing.
Two watershed events turn an old adage upside downContinue
If an issuer defaults, insurance firms can make sure your payments don’t stop
Puerto Rico’s recent history of municipal bond defaults has highlighted the potential benefits of a niche part of the municipal (muni) bond market — insured municipal bonds. Insured munis have accounted for only around 6% of all municipal issuances in the past three years,1 but we believe they can play a role for investors who want assurance that their bonds’ interest and principal will be paid on time — even if the issuer defaults.
What are insured muni bonds?Continue
How diversified credit portfolios can help defend against rising interest rates
In December, the US Federal Reserve (Fed) raised interest rates, as predicted, and raised expectations for more increases in 2017. At Invesco Fixed Income, we believe one of the best ways to handle a rising interest rate environment is to have a portfolio diversified across different credit-related asset classes. Below, we answer some frequently asked questions about how we approach diversification.
What is IFI’s overall outlook for 2017?Continue
Trump’s tax and infrastructure proposals will soon face the reality of US debt and monetary policy. We analyze what to expect next.
Since the US election, financial markets seem to have priced in a significant boost to growth and inflation under a Trump administration. It is still early in the presidential transition, yet the US equity markets have rallied and bonds have sold off in an apparent anticipation of major fiscal policy easing and deregulation under soon-to-be President Trump. The Trump campaign was generally unspecific about its favored policies in most areas, and it also remains unclear which policies will actually materialize. However, we attempt to delve into President-elect Trump’s proposed policy agenda, acknowledging that uncertainty remains high.Continue