Extra-time for low rate environment

Hence in order to support continued progress towards maximum employment, price stability and growth, the Committee decided to maintain its current rates unchanged:

• Funds rate upper bound: 0.25%
• Funds rate lower bound: 0.00%
• Discount rate: from 0.75%

Apropos downside risks, the Fed said that “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.”

• Unemployment: The labour market remains the main concern, despite “some further improvement”. Projections were lowered for Q4 2015 to 5.0% from 5.3%. Over the next 3 years the unemployment rate is expected to stabilize at 4.8%. The Members shifted their natural rate estimate down slightly to 4.9% from 5.0%. Hence the current unemployment rate (5.1%) has not led to rising wage pressures.
• Inflation: Global uncertainties have contributed to the appreciation of the dollar and to lower energy and commodity prices, leading to further downward pressure on inflation. Yellen still tried to characterize that as a “transitory” period. Indeed, the median estimate for core PCE for Q4 2015 moved slightly higher (to 1.4% from 1.3%). 2016 and 2017 projections saw downward revisions to 1.7% (from 1.8%) and 1.9% (from 2.0%). Core inflation is expected to hit the 2% target rate by 2018 according to the median estimate.
• GDP: Recent turmoil in emerging markets, coupled with slow European growth, should weigh on the US economy. 2015 projections were upgraded marginally, reflecting the greater-than-expected growth in Q1 and Q2. The median estimate for 2015 GDP growth moved higher to 2.1% vs 1.9% in June. Growth projections for 2016 were cut to 2.3% from 2.5%; for 2017, to 2.2% from 2.3%. The 2018 GDP growth estimate is 2.0%, matching the longer-run median growth estimate.

 

The Fed has effectively met its employment and GDP mandate. The underperformance on the Fed’s inflation reflects the impact of lower commodity prices and a stronger dollar. However, the continued labour market improvement should reinforce the Fed’s outlook that inflation will return towards the target in the medium term.

MARKET IMPACT

Fed measures

• The Fed’s main focus is on maintaining a stronger economy in a sick world. Thus, the Fed will maintain an accommodative stance as long as is necessary. At the same time, the Fed has persisted in the view that a stream of rate hikes is just around the corner. Janet Yellen’s speech did not exclude any action in the next FOMC meeting in October, even if it isn’t be followed by a press conference.
• These decisions should create volatility, generated by uncertainties on the timing of the lift-off.

Money Market Investment strategy

This meeting confirms that monetary policy accommodation will come to an end soon. Our funds are oriented in this direction so as to outperform our benchmark in such market conditions :

• We are maintaining a very low rate (30 days) and credit duration (150 days).
• Optimal duration allocation on shorter maturities.
• Favouring a higher rating name will generate low volatility in our fund

 

Pierre Boyer
Head of Money Market Fund Management