Diverging views on liftoff
The FOMC (Federal Open Market Committee) participants have diverging views on the timing of liftoff. This is made clear in the minutes of the March 2015 monetary policy meeting that were released on April 8.
The minutes say that “several participants” are happy with the economic data and projections, and that they believe a June 2015 rate hike is possible. The minutes didn’t reveal how many participants subscribe to this view.
At the same time, however, others point to the impact of the strong dollar and depressed energy prices on inflation in the short term. This impact, they argue, would make it inappropriate for the central bank to hike rates as soon as June. According to them, a hike later in the year would be more appropriate.
Two participants opine that liftoff won’t be possible until 2016, given their reading of the economic outlook.
The divergence in views isn’t limited to the timing of liftoff. Two participants believe the FOMC “should seek to signal its policy intentions at the meeting before liftoff appeared likely.” But two others find this contrary to the newly adopted meeting-by-meeting approach. Many participants think that additional information about the policy strategy should be provided to people “after the beginning of normalization.”
What does this mean for investors?
Policymakers who desire a rate hike in June may take a backseat in light of the recent weak labor market reports. Payroll additions in April, which will be released in May, will be crucial to ascertaining whether the March figures were just a blip, or weakness has crept into the labor market as well.
Going forward, if numbers are weak, Treasuries can be expected to continue rejoicing. This would benefit ETFs like the iShares Barclays 20+ Year Treasury Bond Fund (TLT) and the iShares 7-10 Year Treasury Bond ETF (IEF). Equities (SPY) in general and utility companies in particular will continue to benefit from the accommodative conditions.
Corporates have hit the primary markets with debt issues to take advantage of the low interest rates. Companies including Actavis (ACT), ExxonMobil (XOM), and Zimmer Holdings (ZMH) raised large sums in March. More companies may follow.
Unexpected events can fuel volatility as well, so be prepared for that.