The Fed Stands Pat
By James Dondero | September 21, 2015
- Markets were quite volatile last week, with stocks reacting negatively to the Fed’s decision to keep interest rates unchanged. While the FOMC did make it clear rates were likely to rise by year end, “lower for longer” is the message to which markets are now adjusting.
- Bonds however, are benefitting from the announcement as the relatively high yields on the long end of the curve are much more attractive with the FOMC intending to keep short rates “lower for longer” – particularly when compared to similar sovereign debt globally.
- This move from stocks and into bonds however, echoes the general “risk-off” tone to the markets we have been discussing for several weeks. Equally concerning to us are the fundamental storm clouds we see brewing on the horizon of a weakening consumer and massive inventory builds. These could ultimately lead to weaker company earnings, the fear of which is already driving high-yield spreads wider.
- Finally, “lower for longer” on interest rates may continue to help commodities stabilize over the short term. As we noted last week however, we continue to believe that at some point the US dollar will resume its advance which should ultimately benefit stocks here in the US (watch Mark Okada’s CNBC’s commentary).