Fed Leaves Rates Unchanged

Market Overview

Equity market Returns

Sources: Sources: Equity Market, Fixed Income and REIT returns from JP Morgan as of 9/18/15. Rates and Economic Calendar Data from Bloomberg as of 9/21/15.

Happening Now

In the hotly anticipated Federal Reserve rate decision last Thursday, Chair Janet Yellen and eight other voting members decided to leave rates unchanged for an unbelievable 54th straight meeting. The statement released and press conference that followed shed light into why the committee deemed it necessary to keep rates at the same level as when the global economy was staring into the abyss in December of 2008. Continued slack in the labor market and un-met inflation expectations where cited in the official statement released by the Fed; while global equity market volatility and concerns over Chinese economic growth were suggested during Yellen’s Q&A session. We also got a glimpse at the Fed’s “dot plot” chart that displays the 17 FOMC member’s views of where U.S. GDP, Inflation, Interest Rates and the U-4 unemployment rate will be over the course of the next few years. Relative to the June release, there were few changes in the Median Estimates of these measures, summarized below:

Median Estimates

Considering the data in table above paints a more optimistic picture of U.S. GDP growth this year, a lower unemployment rate relative to the June meeting and actually higher core inflation this year, the fact that nine FOMC members voted to leave rates unchanged while only 1 voted to raise brings into question their motivation. The Fed’s dual mandate calls for monetary policy that supports price stability and maximum employment and it appears that by some measures, as depicted above, this criterion is being met.

Whatever the reasoning, the message received by market participants was that the U.S. Economy is not strong enough to endure a 25bps hike, adding to fears that the global economy is slowing down and fueling a sell-off in the S&P 500 index during Thursday and Friday’s trading.  While we at SmartTrust® believe the U.S. economy is strong enough to endure a rate hike and will likely continue to see labor market tightening and a general improvement in economic stability, we are conscious of the divergence between economic and stock market performance.

Important Information and Disclaimers

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ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.

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LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.

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