FOMC the Hawks Awaken

December 21, 2015

FOMC the Hawks Awaken Photo

I had a chance to see the new Star Wars movie, and I’ve titled this post in the spirit of the movie, which by the way is totally awesome. The hawks on the Federal Open Market Committee (FOMC) awakened last week from their decade-long slumber. The FOMC at its meeting decided to raise the Fed Funds rate by 0.25% to a range of 0.25% to 0.50%. The Fed left the door open to future rate increases but also cited that they expected inflation to rise to their target in the coming quarters. The market, however, is signaling that inflation will remain subdued and that the Fed’s expectation for four rate increases next year will not come to fruition in 2016. This should keep bonds well bid. I continue to be a buyer of fixed income assets, especially on any increase in yields.

U.S. equities rallied into and immediately after the Fed announcement but then gave up those gains late in the week to end virtually unchanged week-over-week. All markets continue to have one eye on the price of oil as the commodity made new lows last week, falling below $35/barrel. The high yield bond market has suffered significant losses in the energy and metal/mining sectors due to commodity weakness. Additionally, concerns about market liquidity on the heels of the Third Avenue fund closing and increased scrutiny on the high yield ETFs like (HYG) put pressure on markets.

I expect markets to start to quiet down going into year-end, but any liquidity concerns could cause pockets of heightened volatility.

Tags: Monday Morning O'Malley | Oil | Federal Reserve | Interest Rate | Commodity prices | Fed tightening | Liquidity

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