Pacific Funds, October 2019

Informational commentary from Pacific Asset Management, manager of Pacific FundsSM Fixed-Income Funds.

Did the Fed’s Rate Cut Satisfy Investors’ Sweet Tooth for More Easing?

Key Points:

  • As widely expected, the Federal Open Market Committee (FOMC) cut the federal funds target-rate range by a quarter point to 1.50%–1.75%, the third rate cut this year. 
  • Federal Reserve (Fed) officials made minor changes to their September statement, with markets focused on the Fed altering language from “act as appropriate” to “assesses the appropriate path” as it relates to future rate decisions. 
  • For the first time in six years, the Fed’s rate-setting committee held an unscheduled meeting and announced a plan to: 
    • Buy short-term U.S. Treasury debt, starting at $60 billion per month and continuing into the second quarter of 2020.
    • Conduct term and overnight repurchase-agreement operations through at least January 2020.
  • Expectations for future Fed rate cuts, according to Bloomberg, currently stand at1:
    • December: 24.5%
    • January: 41.9%
    • March: 51.7%

 

Fed officials met market expectations by lowering the benchmark rate by 25 basis points. Federal Reserve Chair Jerome Powell said the “current stance of monetary policy is likely to remain appropriate,” but added the Committee would react through a “material reassessment” should incoming information not align with the Fed’s economic outlook.

Equities pared losses during Chair Powell’s press conference, as comments seemed to emphasize an accommodative and balanced stance by the Fed. Powell signaled a willingness to act as needed because the Committee’s outlook still contained market uncertainties. He stated the Fed would rely on an increased level of incoming data rather than adjusting rates lower to help continue economic growth. This stance was highlighted by the removal of language in the September 18, 2019, statement that said the Committee would “act as appropriate to sustain the expansion.” Below are the Fed’s language changes.

 

October 30, 2019 Statement September 18, 2019 Statement
“Although household spending has been rising at a strong pace, business fixed investment and exports remain weak.
“Although household spending has been rising at a strong pace, business fixed investment and exports have weakened.
“The Committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate.
“As the Committee contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.

 

Our Takeaway

It appears the Fed put may be on hold for the time being. Powell reiterated the Fed is working to sustain a favorable economy, and principal risks are moving in a positive direction. The Committee emphasized its stance will continue to be adjusted based on the evolving risk picture. Two Committee members, Kansas City Fed President Esther George and Boston Fed President Eric Rosengren, dissented, arguing precautionary easing wasn’t needed in light of buoyant domestic demand.

The modest adjustments of the Fed’s message should allow for broader flexibility in future decisions as the Committee assesses changing economic conditions. The Fed balanced its relatively stable economic outlook with the various risks it saw to the U.S. and global economies. Fed watchers will note that Vice Chair Richard Clarida had foreshadowed the Fed’s current stance in an October speech, saying, “Looking ahead, monetary policy is not on a preset course, and the Committee will proceed on a meeting-by-meeting basis to assess the economic outlook, as well as the risks to the outlook, and it will act as appropriate to sustain growth, a strong labor market, and a return of inflation to our symmetric two percent objective.”

In the end, most investors seemed comforted. On the day of the Fed’s announcement, the Dow Jones Industrial Average® Index and the S&P 500® index ended higher, while the 10-year Treasury finished at 1.78%. With the next meeting scheduled for December 16–17, we will have to wait and see if the Fed delivers a present for the markets in time for the holidays. 

 

1Source: Bloomberg Finance L.P., 10/30/19. 


Definitions

One basis point is equal to 0.01%.

The Dow Jones Industrial Average index (DJIA) is an index that tracks the share price of the top 30 large, publicly owned U.S. companies, which is often used as an indicator of the overall condition of the U.S. stock market. 

The S&P 500 index is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the U.S. stock market.


Disclosures

This publication is provided by Pacific Funds. Pacific Funds refers to Pacific Funds Series Trust. This commentary reflects the views of the portfolio managers at Pacific Asset Management as of October 31, 2019, are based on current market conditions, and are subject to change without notice. These views represent the opinions of the portfolio managers and are presented for informational purposes only. These views should not be construed as investment advice, an endorsement of any security, mutual fund, sector, or index, the offer or sale of any investment, or to predict performance of any investment. Any forward-looking statements are not guaranteed. All materials are compiled from sources believed to be reliable, but accuracy cannot be guaranteed.

All investing involves risk, including the possible loss of the principal amount invested.

Pacific Life Insurance Company is the administrator for Pacific Funds. It is not a fiduciary and therefore does not give advice or make recommendations regarding insurance or investment products.

PLFA3

Pacific Life Fund Advisors LLC (PLFA), a wholly-owned subsidiary of Pacific Life, is the investment adviser to Pacific Funds. PLFA also does business under the name Pacific Asset Management and manages certain funds under that name.

Bloomberg Finance L.P. is unaffiliated with Pacific Life Insurance Company, Pacific Funds, their affiliates, their distributors, and representatives.