The Fed held their policy meeting yesterday, and as expected, interest rates were held steady. Here are three key takeaways from Chairman Yellen’s press conference:
- No worries on inflation:
a. Inflation has picked up, but they are "in categories that were historically volatile", so it is unclear whether inflation is sustainable.
b. No sustainable pick up in wage growth, which is a concern for inflation and the job market. There is no handle on why wages are not growing.
c. Both market and survey based inflation measures are at or near historic lows
- The current track of U.S. GDP growth requires a lower path for policy rates:
a. Therefore, the expectations for where the Federal Funds Rate will be in the future is ½% lower than it was when the Fed met in December.
b. It is now expected that there will be two rate hikes this year, as opposed to four.
- Given where the Fed is in its current rate cycle, Yellen was very clear that they will “proceed cautiously” and are much more concerned about being able respond to downside shocks than they are to respond to upside surprises.
We continue to see policy convergence amongst major global central banks as they continue to fight the low inflation battle. This policy feedback loop is expressed in the currency market with continued USD weakness. From a portfolio perspective, this benefits our positioning in more global value and cyclical stocks, as well as our emerging market exposure.