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July Fed Meeting: No Action and a Tea Leaf Still Means “Lower for Longer”

tea leaves

To no surprise, the Federal Reserve (the Fed) left the fed funds rate unchanged on July 27, marking its fifth consecutive meeting without taking action since initially raising rates last December. We are now seven months into the calendar year of 2016 without seeing a change in short-term rates, and the yield on the 10-year treasury now stands at 1.50%, approximately 0.75% below where it closed out 2015. Suffice it to say that in regard to interest rates, this has clearly not been the year most had expected.

Immediately following the release of this July statement, much attention focused on nine words added since June. Those being “Near-term risks to the economic outlook have diminished.” For those looking to read tea leaves, the interpretation was apparent:  The door is now open for a September rate hike.

We would view this one-sentence tea leaf with skepticism in that over the past six months, the Fed has offered up entire tea trees that have not come to fruition. One needs only to remember as recently as late May when chair Janet Yellen stated that a rate hike would be “appropriate in the coming months,” only to reverse that position within days following a weak employment report. For this Fed, tea leaves do not appear to be worth much more than the leaf they are printed on.

Given the strong jobs recovery reported for the month of June and the stock market’s recent rally to all-time highs, the Fed may well be considering a September hike, but that is actually of secondary importance given how difficult it has been for the committee to once again reach the point of subtly signaling to the markets that it is considering action. Should we see a sell-off in stocks, another rough patch in employment data, or stalling inflation during July or August, September will probably go the way of every other month in which the Fed has met so far this year.

In summary, when combining the aftermath of Brexit with the Fed’s continued expressions of caution whenever short-term data is less than favorable and their inherent reticence to disrupt equity markets, we believe any path of future rate hikes will be considerably slower and more measured than originally anticipated by the markets at the year’s onset. Hence, regardless of whether the Fed raises rates in September or any other time in 4Q16, we are still in a renewed “Lower-for-Longer” rate environment solidified by Brexit last month.

 

 

Investments are subject to market risk, including the loss of principal. Asset classes or investment strategies described may not be suitable for all investors.

The information included in this document should not be construed as investment advice or a recommendation for the purchase or sale of any security. This material contains general information only on investment matters; it should not be considered as a comprehensive statement on any matter and should not be relied upon as such. The information does not take into account any investor’s investment objectives, particular needs or financial situation. The value of any investment may fluctuate. This information has been developed by Transamerica Asset Management, Inc. and may incorporate third-party data, text, images, and other content to be deemed reliable.

Transamerica Funds are advised by Transamerica Asset Management, Inc. and distributed by Transamerica Capital, Inc.

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