Fed Holds Steady – Worth the Wait?

Yes and no.

The release of the FOMC’s latest statement yesterday provided investors and the market some predictable narratives as well as some unexpected shifts.

Heading into yesterday’s trading session, investors were expecting no shift in rates and that is what transpired in the release of the FOMC’s latest statement. The Fed kept the Fed Funds rate at 0.25%. The now familiar chorus of concern from the Fed spoke to concerns over weaker than expected economic data in recent months – particularly in the form of Industrial Production and durable goods orders. Those concerns have increasingly offset the gains made in the labor market as excess inventories continue to build. Excess inventories tend to cast a long shadow over expectations for upcoming economic activity.

However, and rather unceremoniously, the Fed dropped mention of global economic headwinds. That was not expected.

Over recent quarters, the increasingly significant role played by global concerns in the FOMC outlook has kept expectations for a move in rates subdued. With that factor not mentioned yesterday and with employment gains and commodities continuing to rally, it would appear as though the Fed is gradually setting the stage for another bump up in rates – barring the unexpected. “Gradual” is the operative. Even with the dropping of global headwinds and with improving labor conditions, the Fed is still data dependent. The data most top of mind is inflation and we are still sub target of 2%. With the vote by the committee to leave rates unchanged by a margin of 9-1 it is unlikely we will see a move in rates in June as I have been expecting.

The interest rate on the 10-year slipped to close at 1.86% on the day while US equity markets posted a mixed session on expanding volume. The Nasdaq fell 25.14 points or 0.51%, weighed down by the tech sector. The S&P 500 (+0.17%) and Dow Industrials (+0.30%) both gained modestly on the day. Volume rose on the Nasdaq by 5.39% and on the NYSE by a more robust 15.29%. It was not a session that spoke to enthusiasm. Rather, now that the FOMC statement is in the rear-view mirror, investors will revert their collective attention to earnings. At the top of that list is Amazon.

flickr photo: mpardo.photo