The most common question we have received in recent months is, “When will the Fed raise interest rates?” Our answer begins with the assertion that we don’t see any immediate pressure for the Fed to raise rates. We end by highlighting the need to watch incoming economic data, as even FOMC members themselves don’t know when they will raise rates. Data published over the last few trading sessions have reaffirmed the first point. The statement released after last week’s 2-day meeting reaffirmed the latter point. On the data front, GDP grew at an anemic rate of 1.5% during the first half of the year. Wages during the second quarter, as measured by the employment cost index, rose 0.2% quarter/quarter, the slowest pace since 1982. Inflation, as measured by the core PCE deflator (the Fed’s preferred measure) rose by 1.3% year/year in June, well below the Fed’s target of 2%. On the statement front, the post-meeting commentary was little changed from the previous meeting, with an affirmation of the continued strength in the jobs market, but acknowledgement that inflation is well below the Fed’s target range. What does this mean for bond investors? We think it means a steady interest rate environment, with longer-term rates unlikely to break out of the range they’ve been in for much of the last few years.
Source: BEA, Bloomberg, Federal Reserve