Why the Fed did not raise interest rates
Just as we predicted for the past year, the Federal Reserve decided not to raise interest rates last week which added more market uncertainty. In our Portfolio Strategy Team meeting this morning we discussed comments by the San Fransisco Fed Chairman, John Williams, that the Fed needs a little more patience, data and assurance to raise rates. He also stated that it was remarkable that we’ve had 2-2.5% domestic growth driven by consumer and business spending, but it was the international issues that gave just enough headwind for the Fed not to move forward. He also sited the fact the Baby Boomers are starting to retire, and this is helping the labor market. As this progresses over time, it could give the Fed the data they need to eventually raise rates.
The need for Fed clarity
Market uncertainty will stay with us until we get more clarity from the Fed on when they foresee raising interest rates. We are hoping both Federal Reserve Chair, Janet Yellen, and the Atlanta Fed Chair will bring some of this clarity the investors and the markets want as they speak later in the week. Other market impacting economic data this week will come from home sales, retail sales, manufacturing, durable goods orders, and consumer confidence.
What caused the market fall off last week?
It was interesting to watch the market react to the Fed’s decision not to raise rates. What we saw was the market rally up to the decision and then fall off. The markets did what we call a “buy the rumor, sell the news”. We believe market uncertainty and investors wanting to take short-term profits led to this fall off.
Could interest rates go up in October?
As we debate whether the Fed will raise interest rates in October, we are focused on what the Fed is watching in making this decision. They will be watching inflation in consumer prices and wage growth, but consumer confidence will play a major role. While they could raise interest rates in October, we do not believe they will do so as there will not be enough data to change their minds by then. This data however, could come in by the end of the year.
Washington’s pressure on the markets
Now that the Fed has made a decision we are going to see if Washington can make one. Speaker of the House, John Boehner, may be up for a vote to lose that office. We believe Washington is going to look very chaotic and disconnected from the public over the next few months. This will put a lot of pressure on the markets. Just the idea of Boehner being removed from office mid-term could make him lean more conservative and towards a debt ceiling/government shutdown which could really impact the markets.
If the leadership of this country continues to be dysfunctional and the Fed does not bring clarity, there is a good chance we may be moving our clients’ portfolios more to cash. There is a lot of tension and stress still out there. We will keep you informed on the important news and issues as well as moves in our portfolios.
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Greg Powell, CIMA
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Ashley Page, JD, MBA
Senior Vice President
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Bobby Norman, CFP®
Email Bobby Norman here
Trey Booth, CFA®
Email Trey Booth here
Fi Plan Partners is an independent investment firm in Birmingham, AL, serving clients across the nation through financial planning, wealth management and business consulting. Fi Plan Partners creates strategies in the best interest of their clients using both fee based investing and transactional investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
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