Investors have started to question whether all the necessary conditions will ever be in place for this Federal Reserve (Fed) to begin tightening monetary policy after last month's FOMC rate decision (or maybe better labeled "indecision" after several FOMC members appeared to immediately backtrack from the dovish tone of the September FOMC statement).
Fed Chair Yellen's press conference comments that the Fed is "focused particularly on China and emerging markets" created even more uncertainty about the future course of monetary policy. Uncertainty regarding Fed policy has now reached a point where officials from the same emerging market countries supposedly being helped by our zero interest rate policy urged Fed Vice Chairman Stan Fisher in Peru last week to "just do it" regarding Fed liftoff.
This week's chart tracks fixed income market expectations for time remaining before the Fed begins to tighten monetary policy. Markets have been consistently pricing in Fed liftoff to occur sooner than reality. Investors are now left to question whether the markets will be in a permanent state of "hurry up and wait," expecting Fed liftoff to be just around the corner.
Key Takeaway: In the process of trying to provide more transparency to the financial markets, mixed messages from the Federal Reserve have only confused investors. The equity market sell-off immediately following the September Fed rate decision is one sign of its eroding credibility. Fed officials must begin to provide a more consistent message to the markets about the conditions necessary to begin liftoff and when the U.S. economy will be strong enough to withstand short-term interest rates above zero.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results. All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.
High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.
All trademarks are the property of their respective owners. This material may not be reproduced in whole or in part in any form, or referred to in any other publication, without express written permission.