Fed Keeps Rates Unchanged. The Number of Dissenters Increase.

September 26, 2016

Fed Keeps Rates Unchanged. The Number of Dissenters Increase. Photo

The Federal Reserve (Fed) chose to keep rates unchanged at last week's meeting; however, the decision was far from unanimous. Three Federal Open Market Committee (FOMC) members dissented from the decision. The Fed indicated they expect to raise rates by year end if the economy continues on its current path. The reaction from the markets on a continued dovish Fed was for stocks to rally and the yield curve to flatten. I continue to remain cautious on both bond and stock prices over the next several months due to valuations.

One concerning and potentially negative signal for Treasury bond prices is that foreign central banks have reduced their holdings for the third consecutive quarter according to Federal Reserve custodial data (Bloomberg source). Central banks have been a consistent and important buyer of Treasury bonds as U.S. deficits have risen. Even during the most recent issues with Saudi Arabia around 9/11 legislation, the prospect of the kingdom selling Treasury holds has been tossed around. Given that deficits most likely will rise in the coming years no matter who wins the upcoming elections, the supply/demand balance of the Treasury market will be an important factor for prices.

In this environment, I remain more and more cautious on longer-maturity Treasury securities.

Tags: Monday Morning O'Malley | Federal Reserve | Interest Rates | Central banks | Saudi Arabia | U.S. Deficit

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This blog post is for informational use only. The views expressed are those of the author, Dave O’Malley, 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.

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