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Wall Street to Your Street
September Recap: Fed Debates Rate Hike Date
October 8, 2015 | Jeff Branstad, CFA, Investment Product Management
Recap from the month ended Sept. 30, 2015
The U.S. Federal Reserve decided to wait longer before raising the short-term federal funds rate, citing a near-term softening of inflation expectations amid the recent global market decline and falling commodity prices.
By the numbers
Market activity in September, as reflected in the most common market indexes we follow.
|Dow Jones Industrial Average1||-1.4%||-7.0%||10.0%|
|S&P 500® Index2||-2.5%||-5.3%||13.7%|
|Russell 2000® Index3||-4.9%||-7.7%||4.9%|
|MSCI EAFE Index4||-5.0%||-4.9%||-4.5%|
|MSCI Emerging Markets Index5||-3.0%||-15.2%||-1.8%|
|Barclays U.S. Aggregate Bond Index6||0.7%||1.1%||6.0%|
|Barclays 20+ Year Treasury Index7||1.5%||-0.2%||27.5%|
|Barclays U.S. Corporate Investment Grade Index8||0.8%||-0.1%||7.5%|
|Barclays U.S. High Yield Index9||-2.6%||-2.5%||2.5%|
|Barclays Municipal Bond Index10||0.7%||1.8%||9.1%|
|U.S. Treasury Yields||As of|
|3-Month U.S. Treasury Bill||0.00%||0.08%||0.04%|
|5-Year U.S. Treasury Bond||1.37%||1.54%||1.65%|
|10-Year U.S. Treasury Bond||2.06%||2.21%||2.17%|
|30-Year U.S. Treasury Bond||2.87%||2.95%||2.75%|
Global market turmoil pauses fed plans
Earlier in the year, many market watchers were predicting the Fed would raise rates in September. However, as summer progressed, a series of concerning global developments cast doubt on that forecast. Perhaps the biggest driver has been the slowing down of China’s economy, which has triggered negative performance in stock markets around the world and led to rallies in safe-haven investments like U.S. Treasury bonds. While economists have been expecting a slowdown in China’s growth rate, numerous underwhelming economic reports and a collapsing Chinese stock market have suggested the slowdown could be much more dramatic than initially anticipated. This has in turn led to a global decline in commodity prices, which has an oversized negative impact on the economic output of emerging markets, many of which rely heavily on exporting their natural resources. The end result is a slowdown in the world economy, making the Fed a little more cautious about tightening its monetary policy.
In the U.S., a strong top-line unemployment rate of just 5.1% hides some of the slack still existent in the domestic labor market. A relatively low labor participation rate and little upward pressure on wages suggest there is still plenty of room for improvement. The lack of upward wage pressure has teamed with falling commodity prices to keep inflation below the Fed’s target of 2%. Raising rates would put further downward pressure on inflation, which can negatively impact consumer spending. People are more likely to postpone purchases if they think prices are going to continue to fall, and if prices aren’t rising, there is less incentive for companies to pay higher salaries to employees, which also inhibits consumer spending. So rather than risk pushing inflation lower, the Fed chose to wait a little longer before beginning to raise rates.
Fed rate hike still probable for later in 2015
Despite the number of immediate challenges facing the Fed, most voting members are still leaning toward raising rates before the end of the year. Federal Reserve Board Chair Janet Yellen stressed once again that the Fed’s decisions are data dependent and will change depending on economic circumstances, but she also asserted that the recent global developments have not altered the Fed’s longer-term outlook and that they expect their effects on inflation to be short lived. The Federal Reserve will certainly be paying close attention to reports on global growth and U.S. employment in order to determine the timing of the initial interest rate lift-off.
In their Market Commentary, Thrivent Asset Management leaders discuss the financial markets, the economy and their respective effects on investors. Writers’ opinions are their own and do not necessarily reflect that of Thrivent Financial. Forecasts, estimates and certain other information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. From time to time, to illustrate a point, they may make reference to asset classes or portfolios they oversee at a macro-economic level. They are not recommending the purchase of any individual security. Asset management services provided by Thrivent Asset Management, LLC, a wholly owned subsidiary of Thrivent Financial, the marketing name for Thrivent Financial for Lutherans.
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1 The Dow Jones Industrial Average is an index of 30 "blue chip" stocks traded in the U.S.
2 The S&P 500® Index is a widely followed index, and is composed of 500 widely held U.S. stocks.
3 The Russell 2000® Index measures performance of small-cap stocks.
4 The MSCI EAFE Index measures developed-economy stocks in Europe, Australasia and the Far East.
5 The MSCI Emerging Markets Index measures developing-economy stocks.
6 The Barclays U.S. Aggregate Bond Index measures performance of a wide variety of publicly traded bonds.
7 The Barclays 20+ Year Treasury Index measures performance of longer maturity treasury bonds.
8 The Barclays U.S. Corporate Investment Grade Index measures performance of the investment grade bond sector.
9 The Barclays High Yield Index measures performance of the high yield bond sector.
10 The Barclays Municipal Bond Index measures performance of the municipal bond sector.