In the September 2014 Thought Leadership Insights blog, we focused on thought leaders’ responses to the Fed’s ambiguity concerning the future of quantitative easing. Asset management firms closely followed the Fed’s signals this month, with a significant amount of predictive and reactive commentaries surrounding the FOMC’s March 18-19 meeting. This month, we revisit the issue of monetary policy as it relates to the overall domestic economic landscape, discussing five notable thought pieces on the subject. Some commentaries that we highlight are speculative – occurring before the meeting – while others are reactive.
1. AB: March FOMC Meeting: What to Expect and How Markets May React – Posted a week before the meeting, this commentary proposes three major influencers on the Fed’s decision to move toward normalization. The first two are the past growth and projected improvement of the labor market. The third influencer is the anticipation that inflation will hit its estimated target of 2% during the mid-term. The article predicts that the FOMC will raise rates at the June meeting if the three suggested influencers continue as projected.
2. Federated: FedWatch: Removing “Patient” Doesn’t Mean Impatient – This piece suggests that the removal of the word “patient” from the Fed’s statement regarding normalization does not signal drastic change, as others have predicted. Instead of employing a timeline for rate liftoffs, the FOMC will likely rely on the performance of the labor market and inflation in order enact changes. The report suggests that rate lifts can be expected in September – rather than June as some outlets have proposed – and that increases will be more moderate than anticipated.
3. OppenheimerFunds: FOMC Statement is Not the Release that Matters Most – Posted the day before the FOMC meeting, this commentary takes a different approach by downplaying the influence that the FOMC meeting will have on the U.S. economy, and instead highlighting the impact of global macro forces. The commentary proposes that central banks in major economies such as Europe, Japan and China are the real influencers for policy innovation. Due to the U.S. economy’s general improvements over the past quarter, the article suggests the Fed does not need to resort to unconventional monetary policy.
4. Allianz: Four Takeaways from the FOMC Meeting – This straightforward piece summarizes four major talking points from the FOMC statement. Firstly, Allianz discusses the Fed’s removal of the word “patient”, lending weight to predictions that the earliest the Fed will announce rate hikes is during the June FOMC meeting. Next, although economic growth has lagged recently, employment continues to flourish. Thirdly, inflation rates are expected to move upwards to 2% during the medium term, and the Fed expects the “low for long” trend to continue. Lastly, Allianz emphasizes that the Fed’s signals show that future rate adjustments will depend on evolving economic data, with the FOMC clearing leaning toward long-term goals.
5. J.P. Morgan: The Investment Implications of Fed Tightening – This in-depth commentary recaps the March FOMC meeting, and reports that the Fed is increasingly cautious when it comes to discussing interest rates. Like Allianz, J.P. Morgan notes that the Fed will likely not be raising rates in a consistent pattern as it has done in the past, and decisions will instead be data-driven. The piece delves into how monetary tightening will influence exchange rates, predicting that the trade deficit will widen and lead to slow growth over the next two years. The commentary also discusses the implications of Fed tightening on currency appreciation and the potential effects across domestic and emerging markets.