Will the Fed Tightening Happen in September, December or 2016?

July 13, 2015

Will the Fed Tightening Happen in September, December or 2016? Photo

Last week at our Investment Committee meeting, I asked the team to share their expectations for when the Fed would raise the Federal Funds rate. The vote was six for September and two for December. No one thought the Fed would wait until 2016. The team was a little more hawkish than the market, which has been at around 50/50 odds for a September or December increase. Our dialog at last week's meeting also covered the global implications of the events taking place in China, Greece and Puerto Rico and their potential impact on Fed policy and U.S. growth. Take a look at Mark Heppenstall's post entitled "The Potential Impact of Greece, Puerto Rico and China on Investments" from last week.

The overall impact from the developing situations in Greece, China and Puerto Rico should have an immaterial impact on fundamental economic growth in the U.S. As a result, the Federal Reserve will most likely look past these issues when determining its timing to raise interest rates. I expect economic data to continue to improve both in the U.S. and globally as monetary conditions continue to be very accommodative. I expect the 10-year Treasury to ultimately reach 3% during the second half of 2015. However, given the long-term deflationary conditions, at this point I would view 3% to be a good buying opportunity of bonds.

Recent U.S. equity performance, albeit lower, has been better than my expectation given the latest headline news. This performance raises questions as to the timing of a potential sell-off for U.S. equities. I continue to hold to our forecast that the S&P 500 Index will end the year at 1950, but the market may trade sideways in a tight range for the remainder of the summer.

Tags: Monday Morning O'Malley | Federal Reserve | Interest Rate | Deflation | S&P 500 | 10-Year Treasury | Forecast

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