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Has the Fed Taken Rate Hike Timing off the Table?

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FOMC’s April 2015 policy statement

The FOMC (Federal Open Market Committee) is the US central bank’s rate-setting committee. The FOMC met on April 28–29, 2015, in a scheduled meeting to decide on the federal funds rate, its balance sheet, and policy guidance. It kept the target range for the federal funds rate unchanged at 0%–0.25%.

Market participants weren’t actually expecting any change in the federal funds rate in this meeting. Instead, they were interested, as were others, in whether the FOMC would make any significant changes in the policy announcement. This could hint at a possible timing for a rate hike.

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The Fed disappoints everyone

But the Federal Reserve disappointed everyone. The committee had already taken the word “patience” out of its policy statement in the March meeting. Now, the committee took out any and all references to time.

After issuing its forward guidance in the March statement, the FOMC stated, “This change in the forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range.” It also stated that “the Committee judges that an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting.”

In the April 2015 statement, the FOMC did not refer to any timing at all with reference to a rate hike. As far as the rate hike is concerned, all signs of timing are off the table.

Possible impact

Equities have been big beneficiaries of quantitative easing measures. One has been low interest rates. Equities should continue to benefit, helping ETFs like the iShares Core S&P 500 ETF (IVV) rise, although with higher volatility.

Treasuries and bonds will also breathe easily since a rate hike could potentially increase interest rates in the financial system, thus pushing yields up. This would negatively impact prices and thus investors in ETFs like the iShares Barclays 1-3 Year Treasury Bond Fund (SHY) and the Vanguard Total Bond Market ETF (BND).

Due to a favorable yield environment, corporates like AT&T (T), Actavis (ACT), and ExxonMobil (XOM) have thronged the primary bond market to raise money. They will get some more time to raise debts comparatively cheaply.

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