We have updated our projected Federal Reserve timeline based upon outtakes from the last Federal Reserve Open Market Committee meeting earlier this month. As a result of what we know, based upon what the Fed has communicated and what we contend (see summaries of each below), in addition to current economic data reports and forecasts, here is our current projected Fed activity timeline through the end of 2016. Please note: 2016 FOMC meeting dates are projected and not confirmed at this time.
Potential Federal Reserve Action Timeline as of March 2015 (subject to change)
|FOMC Meeting||6/17/2015||Fed Funds Rate Hike of 0.25%|
|FOMC Meeting||9/17/2015||Fed Funds Rate Hike of 0.25%|
|FOMC Meeting||12/16/2015||Fed Funds Rate Hike of 0.25% (to coincide with current median forecast of 0.75% by the end of 2015)|
|FOMC Meeting||3/18/2016||Fed Funds Rate Hike of 0.25%|
|FOMC Meeting||6/17/2016||Fed Funds Rate Hike of 0.25%|
|FOMC Meeting||9/17/2016||Fed Funds Rate Hike of 0.25%|
|FOMC Meeting||10/28/2016||Fed Funds Rate Hike of 0.25%|
|FOMC Meeting||12/16/2016||Fed Funds Rate Hike of 0.25% (Fed Funds Rate currently projected at approximately 2.00% by end of 2016)|
Summary of some of the most recent public statements from the Federal Reserve:
- Fed Chair Janet Yellen announced her that the committee has now dropped the word “patient” from their official statement putting the central bank on course to hike rates as early as June, though this may not start until September. However, Yellen did caution during a press conference that, “Just because we removed the word patient from the statement doesn’t mean we’ll become impatient.” Although an increase in the federal funds rate remains highly unlikely at the April meeting, Yellen said the central bank has not ruled out a rate hike in June while it continues to evaluate progress on the employment and inflation fronts.
- The weighted average forecast of all Fed voting policymakers for the next three years is as follows:
- 2015 = 0.77% (rounded off to 0.75% if movements are made in 25 Bp increments)
- 2016 = 2.02% (rounded off to 2.00% if movements are made in 25 Bp increments)
- 2017 = 3.18% (rounded off to 3.25% if movements are made in 25 Bp increments)
- To show the wide range of opinion amongst Fed policymakers, look no further than the chart below which shows the target of the 17 voting members for the year 2016 as of the March 2015 meeting. The weighted average forecast of Fed policymakers for the end of 2016 currently is 2.02%, which is lower than the 2.68% target level as of September 2014 but still higher than the 1.75% level that was forecasted back in December 2013.
|2016 Target Rate||Number of Voting Fed Members||% of Voting Fed Members||Weighted 2016 Target Rate|
Source: Board of Governors of the Federal Reserve System, Fed’s Projection of the Midpoint Target Range or Target Level, March 2015.
Summary of current contentions by Hennion & Walsh:
- When it does begin to raise interest rates in 2015, we believe that the Fed will likely follow its blueprint that it utilized during the 2004-2006 tightening period when it gradually raised the Federal Funds Target Rate on 17 different occasions in 25 Basis Point (e. 0. 25%) increments over this timeframe. This gradual, drawn-out tightening remains appropriate, in our view, given the Goldilocks state of the U.S. economy which is not “too hot” (in terms of gross domestic product (GDP), employment and inflation) standpoint to warrant a shorter tightening timeframe or larger increments of increases and not “too cold” where the Fed would consider additional stimulus measures including, but not limited to, maintaining current record low interest rate levels for an even further extended period of time.
- Given that it is no longer a question, of if but rather when the Fed will start to raise interest rates in 2015, investors would be wise in our view to consider asset classes or sectors that have historically performed well on a relative basis during previous gradual periods of tightening on the part of the Federal Reserve (see 2004-2006 example above). According to Bloomberg, the table below shows the cumulative total return performance of the 10 GICS sectors for the holding period 1/1/2004 through 12/31/2006.
|GICS Sector Name||Period Total Return %|
Source: Bloomberg, March 2015. Cumulative total return data provided for the period 1/1/2004 – 12/31/2006. Past performance is not an indication of future results.