The Federal Reserve BlinkedSubmitted by Destination Wealth Management on March 22nd, 2019
We have been saying for some time that we believe the Federal Reserve would likely raise interest rates far less than people feared. Our belief was the economy was slowing and there would be no need to raise rates in a significant way. Turns out, this apparently is what is going to happen in terms of rate policy. Rates will likely not rise this year according to commentary by the Federal Reserve released this week.
The rationale the Federal Reserve provided for not raising rates was that the economy is slowing and that the need to reduce inflationary pressures has decreased. Said another way, GDP growth is just not as strong as the Federal Reserve predicted last year. That perspective is reflected in their stated outlook for 2019 where they reduced their expectations or Economic growth.
A recent CNBC article highlighted the Federal Reserve’s decision:
The Federal Reserve likely just stalled interest rate increases for the year.
The move announced Wednesday should please President Donald Trump, who has repeatedly urged the central bank to hit the brakes on rate hikes. But he may not like the Fed's caution when he sees the factors driving it.
As they kept the federal funds rate steady in a range of 2.25 percent to 2.5 percent, Fed officials also cut their economic outlook. They now expect gross domestic product growth of 2.1 percent this year, down from a 2.3 percent estimate in December.
They also suggested no rate increases would come this year — after indicating in December that two could take place.
Source: March 20, 2019 CNBC.com article by Jacob Pramuk
Dividend stocks and fixed income positions were impacted negatively when rates were spiraling upward last year. You may have noticed that many of these assets have shown strength as interest rates fell relative to higher rate expectations. We believe this trend will continue and that a diversified mix of assets, some that pay dividends, as well as short to intermediate duration fixed income positions may be a positive addition to portfolio strategies.
While the news of interest rates not rising certainly is welcome, it does again highlight that economic growth on a global basis is slowing. This includes the United States. There are some that have suggested that the United States is headed towards recession and we believe that is likely a lower than 50% probability this year. Next year is another story and, if economic growth continues to slow, a recession may be in the cards next year. We will be watching the data closely.
Portfolios are positioned based on an expectation the rates would not rise and fortunately that is exactly what has occurred. We will continue to adjust as needed as conditions change. If you have any questions about this information, please let us know. Happy to help!!!!!