On Wednesday, the Federal Open Market Committee completed its June policy meeting and kept the federal funds rate unchanged at 0.25% to 0.50%.
The meeting concluded with a press conference and meeting report showing a slower pace of rate increases through 2017 and a weaker economic outlook. The U.S. market was mostly expecting the federal funds rate to remain unchanged; however, the slowed pace of rate increases and weaker economic outlook appeared to be a slight surprise that resulted in further stock market losses.
On Wednesday, the Dow Jones Industrial Average closed at 17,640.17 for a loss of 34.65 points or 0.20%. The Standard & Poor's 500 was also down, closing at 2,071.50 for a loss of 3.82 points or 0.18%. The Nasdaq Composite closed lower at 4,834.93 for a loss of 8.62 points or 0.18%. The VIX Volatility Index was lower with a loss of 0.38 points or 1.85% at 20.12.
Financial stocks in the Dow Jones Industrial Average were lower on Wednesday following the report. Leading U.S. banks JPMorgan (JPM, Financial) and Goldman Sachs (GS, Financial) were both lower. JPMorgan was down 0.19% while Goldman Sachs was down 0.01%.
While most investors did not expect the Fed to raise rates in June, its statement and press conference were slightly more cautious on the economic outlook than expected. Additionally, global concerns including the June 23 U.K. exit vote were also cited as factors not previously discussed in great detail leading up to the Fed meeting.
Changes to the Fed’s outlook in June according to its policy statement were primarily focused on the labor market, which indicated that the May report did have a substantial effect on the FOMC’s June policy decision. In May, the Commerce Department’s employment data showed an increase of only 38,000 jobs compared to an expectation of 158,000. The unemployment rate was lower at 4.7%, but it appeared to be mostly a factor of a smaller statistical population.
Further evidence supporting weaker labor market growth continued on Thursday with data on jobless claims. Jobless claims were up 13,000 after a decrease of 4,000 in the previous week’s report.
Given the current market environment in the U.S. and globally it’s not a surprise that the expected pace of rate increases has slowed substantially; however the Fed’s projections overall are consenting to a slower economic growth outlook for the near term.
In March, the Fed’s projections for rate increases remained aggressive. March projections showed the Fed’s seriousness on policy tightening continuing to send a global message on its monetary policy direction. In March, rate projections ranged from 0.5% to 1.5% for 2016 and 1.5% to 2.8% in 2017.
In June, these projections were lowered specifically for 2017, and the FOMC decreased its GDP projections. Projections for the federal funds rate remained at 0.5% to 1.5% for 2016. For 2017 projections for the federal funds rate were 0.5% to 2.5%, indicating that only one rate increase would occur in 2016, and rates could stay at a 0.5% minimum level for longer. The new projections for GDP were lower in both 2016 and 2017. For 2016 the FOMC projects GDP growth at 2.0%, down from 2.2% and for 2017 the FOMC projects GDP growth at 2.0%, down from 2.1%.
Overall, the market sentiment is for one increase to a level of 0.5% to 0.75% with that likely to be a constant level for longer. Stocks have been falling since the new projections were released, but the overall sentiment priced in the market now is for one additional increase which gives the Federal Reserve the latitude to make its next rate increase at any of its remaining 2016 Fed meetings regardless of global factors. Global markets are pricing in a federal funds level at a minimum of 0.5%, and it seems that one rate increase to that level will not cause global investment volatility and should be a good level for the U.S. given the lack of need for further credit tightening in a weaker economic environment.
Overall, while the Fed did not increase rates in June it nearly reported a guarantee that rates would move to a minimum of 0.5% before the end of the year. The overall sentiment for the market from a Fed perspective is slightly more cautious on economic growth which has been the trend in recent weeks.
For consumers this appears likely to be a positive as borrowing rates will only increase slightly. For investors this means fixed income yields are going to remain at lower levels for longer which could potentially push more investors to equities helping the U.S. stock market to reach its new highs in 2016.
Start a free seven-day trial of Premium Membership to GuruFocus.
