Since the last FOMC meeting in March, economic growth has obviously slowed leaving the probability for an another interest rate increase low. Expectantly, at the conclusion of wednesday’s meeting, the committee left rates unchanged with an acknowledgement of slowing domestic growth. While prior meetings indicated “global economic and financial developments continued to pose risks”, this meeting’s comments adjusted that focus to “closely monitor inflation and global economic and financial developments”. The words “pose risks” were omitted from the comments, with the assumption that those risks have dissipated somewhat. Fortunately, the FOMC’s comments have been refocused to its mandated policy agenda, domestic inflation and employment. However, the health of the US economy is concerning, leaving the future path of policy normalization in question once again.
The FOMC’s concerns over slowing growth were confirmed when the BEA (US Bureau of Economic Analysis) reported US economic growth (GDP) for the first quarter of 2016 at just 0.5% annualized or 0.125% for the first three months of the year, the slowest in two years. The lackluster growth figures support the FOMC’s argument for leaving rates unchanged in the near future. Even though coming into this month’s meeting, the probability of another rate hike after December’s disastrous increase was highly unlikely. Interestingly, the probability of a hike in June has fallen from 73% at the beginning of this year to 12% today. The most likely rate increase may occur in December 2016 with a 58% probability according to the Fed Funds futures market.
This information points to a disturbing trend; the FOMC wanting to return to a path of more normal interest rates, but unable to due to an economy that continues to slowdown. It also supports FOMC critics who say that low interest rates over such a long period of time have actually hindered the growth capabilities of the economy, leaving the US stuck in a perpetual low yield, low growth environment.
What can the FOMC do if the US economy doesn’t meet their second half year growth expectations of 2.2%? Would a reversal of the rate increase after the December 2015 meeting, the first in almost a decade, help improve growth? The market is pricing in a 0% probability of that occurring and it would constitute doing more of the same thing while expecting a different result. Maybe negative interest rates like what the ECB (European Central Bank) has employed? But the results of that experiment have been frightening, leaving the European Union’s economy in even worse shape. Critics state that interest rates have been too low for too long and that the FOMC missed its opportunity to begin its path back to normalization during a time when the economy was growing a little faster than it currently is. Now they are stuck between a rock (Zero % Rates) and a hard place (Slow GDP Growth) with very little ammo (Policy Tools) left.
Why is it so important to pay attention to FOMC policy decisions? Does an investor really have to consider how they should invest their retirement money based upon whether the Federal Reserve is going to affect the interest rate charged to banks? The short answer is yes. The longer answer is a bit more involved, especially during these unprecedented times of zero percent interest rates, coordinated central bank policy and unprecedented levels of debt.
At DeCesare Retirement Specialists we prioritize safety of capital above growth opportunity during volatile times. We continue to employ counter risk measures alongside a prudent growth strategy in order to protect capital in what continues to present as a challenging economic and investment environment.
Should you have any questions and/or concerns about your accounts with us or outside of our management, please call me at 856.235.3830 or email me at Steve@DeCesareRetirement.com.