Welcome to the Bryn Mawr Trust Wealth Management Podcast, providing commentary on what’s moving the financial markets, financial planning, and other timely business and monetary topics. Please welcome today’s host Jim Barnes, director of fixed income at BMT Wealth Management.
[JIM BARNES] Hi, my name is Jim Barnes. I’m the director of fixed income here at Bryn Mawr Trust. We’re excited to be back with you again discussing today’s Federal Open Market Committee meeting that took place– at least the conclusion took place around 2 o’clock earlier today. In regards to today’s meeting, there was much anticipation for today’s meeting given some of the economic data that we had received since the last time that the Federal Reserve had met.
So probably the best way to begin is just to do a quick recap and kind of touch on some of the important parts that had taken place six weeks ago when the Federal Reserve last held the Federal Open Market Committee meeting. If you recall, at that time I spoke about some of the comments out of the Fed. They had generally pointed towards a lot of the weak economic data coming out of not so much in the US but more outside the US, and they had pointed towards China, Europe as two areas that they were concerned that if it had maintained those same negative trends that it was possible that that economic data could possibly spill into just some negative sentiment here within the US.
They also, if we recall in 2019, they lowered their expectations for rate cuts this year. Initially they were anticipating to increase the federal funds target rate to two times, but at the last minute they had actually dropped it from two down to zero. They also mentioned a number of issues that were outstanding. We know that we had a fiscal stimulus that was fading in 2019, we had some uncertainty related to Brexit, and then we still had these ongoing trade negotiations between the US and China.
So those are some of the things that they had discussed at the last meeting, and we know that the market had started to revise lower their expectations for rate cuts in 2019. They just thought that some of the pressures that were building outside of the US were just becoming too strong, and that the Federal Reserve would probably have to act one way or another. But interestingly enough since the last time that we spoke here, over the past six weeks what we found out is that US economic growth, anyway, was up by 3.2%. So that was a very, very strong start to 2019.
Some of the weak data that we have received outside the US started to improve, most notably in China, so that had been somewhat of a positive. And as labor market that we continue to talk about over and over again just because it seems to be so resilient, it continues to get better and stronger. In February we had added another 200,000 jobs. So the labor market continues to get better, and stronger, and just overall very healthy.
But the one thing that really started to grab attention over the last six weeks was just inflation, or I should say the lack thereof. And we’ve just had so many different types of readings whether it’s a headline inflation or core inflation which basically strips out some of the impact from food prices or energy prices. And as we know, the Federal Reserve tries to target a 2% inflation rate, and it’s been a lot lower than that. It’s been trailing probably around 1.3, 1.4, 1.5 depending on what data series that you look at. But I would say the overall theme there was that inflation was coming in much slower than what had been anticipated, and everybody was focused in on today’s FOMC meeting to see exactly what the Fed’s reaction to that was going to be.
With that being said, we get the announcement, as I said, around 2 o’clock today. And here is just some of those specifics, the takeaways. The Federal Reserve did leave the Federal Reserve range at its current 2.5% to 2 and 1/2 percent, so no change there. In regards to what we refer to as the interest on excess reserves– that is the at the amount of interest that the Federal Reserve will pay banks for any excess cash that they have in excess of the required amount– that had been at 2.4%, and they actually dropped that down to 2.35%. And that was also somewhat widely expected, as well.
In regards to the balance sheet, the Fed’s balance sheet, there is really no new developments there. We know that the Federal Reserve is winding down its reduction of the size of its balance sheet, and that’s expected to finish up in September. And there are no– there were no changes there, either.
I will say that with the FOMC statement there’s some things to point out within their comments. They did note that the labor market still remains very, very strong. They talked about the economic activity and, first quarter economic activity to be specific rose at a very, very solid rate. So both those pieces are both positive information as regards to just the overall economy, but then they stated– and this is a quote from the statement– on a 12 month basis, overall inflation and inflation for items other than food and energy have declined and are running below 2%
So that was a very interesting statement, or I should say the sense within the statement, just seeing how the Federal Reserve acknowledged the low inflationary data that’s been received. And it’s interesting and it’s important because if they’re paying very close attention to that and they’re talking about it, they’re discussing it, then it’s very possible that they could drop interest rates purely on that one factor alone all because that’s– you know, keeping inflation around 2% is one of their primary objectives that they pay attention to.
With that being said, when that FOMC statement was released the bond investors reacted by pushing up bond prices and dropping down bond yields as they started to price in a higher likelihood that the Federal Reserve might have to drop interest rates before the end of the year. Now, the Fed meets eight times a year and they provide that FOMC statement at the conclusion of each one of their meetings. And then at the end of each one of their meetings this year, the chairman Jay Powell will get up and he will host a press conference where the media is able to ask the chairman questions in regards to the statement or in regards to anything that they’re seeing. Again, so the market can try to get some additional insight as to what we can expect from the Fed for the rest of this year.
And it was interesting because as you would expect you get a lot of questions in regards to what is the Fed’s thinking for inflation for this year. You acknowledge the fact that some of the inflationary data has been trending lower, and this is when we think that monetary policy is somewhat accommodative. And quite frankly, are you concerned about the low inflationary data?
And Jay Powell came back, Chairman Powell came back and said, look, we acknowledge the fact that inflation isn’t exactly where we need it to be. It has been trending lower in the first few months of this year, but we’re not overly concerned at this point. We think that some of the factors that have been pushing prices lower are transitory. And what he’s referring to is somewhat outliers. Things that might have had a negative impact on inflation, but they’re not expected to continue for the remainder of the year.
And one example that he gave within his press conference is simply just apparel prices. Apparel prices, clothing, have dropped quite a bit, at least according to the index that they’re referring to. And they look at that as somewhat transitory because the way they were calculating prices, the methodology had changed. And that’s something that they kind of viewed as somewhat of an outlier, and he thinks that it’s not going to have a long term negative impact on prices overall. And that they do expect inflation just to go up towards 2%.
And it does kind of makes sense because if you have a strong labor market and if you have economic growth that’s north of 2%, you would think at some point as this excess capacity continues to work its way off the system you should have some upward pressure on inflation. Now again, we didn’t see it in the first quarter of this year, but it seemed as if the Fed still anticipates that to occur for the rest of 2019.
And it’s interesting because in paying attention to the bond yields as the asset chairman was speaking, when he started to refer to and mentioned the word transitory and expectations that inflation will continue to trend higher– or I should say reverse its current course and trend higher– bond yields immediately had jumped higher. And to put that in perspective, the two year US treasury note had reached as low as 2.2% shortly after the FOMC statement have been released at 2 o’clock, but then it’s got as high as a 2.3%, so a jump up of 10 basis points, once the market started to factor in some of Jay Powell’s comments, and thoughts of the overall Federal Reserve, and to what their expectations are for inflation going forward.
So that’s kind of what happened a little bit on the bond side. On the equity side, we saw that it’s interesting. Equities initially started to jump higher after the FOMC statement was released, and that’s probably because of the– you know, the statement came across as being somewhat dovish and expectations for rates to stay lower or a possible drop.
And when you think about the fact that economy is still growing positively, the equity markets reacted on the upside. And that’s just taken in consideration the fact that monetary policy will be more accommodative for a little bit longer, which is generally bullish for economic growth and potentially corporate profits, as well. With that being said, the S&P 500 actually dropped 3/4 of a full percentage point once they realized after listening to Jay Powell during his press conference at the end that this statement isn’t as dovish how it was initially interpreted.
And at this point, maybe rates are going to stay where they’re at for a longer period of time. And these rate cuts that the market have been expected, they simply just might not pan out. And I think the equity markets reacted with someone with a negative tone when kind of digesting the full picture there.
In regards to the BMT, the investment team’s overall view, it really hasn’t changed much. I mean, our thoughts have been pretty consistent throughout this year where we do not anticipate any rate cuts for this year. That’s simply because the economic data that we see just we don’t believe warrants it. When you have an economy that continues to grow north of 2%, even though we do think it’s decelerating relative to what we saw last year, that’s still above average growth in our view. And at this point, barring any type of unforeseen event– something that would knock growth of it’s north of 2% trend– it just doesn’t seem as if the economy is in need of any more or additional accommodative policy.
So with that being said, again, no change today on the federal funds target range. The Federal Reserve keeps it at 2.25 to 2 and 1/2 percent. The Federal Reserve will meet once again six weeks from today, so definitely look forward to giving you an update after that meeting. But with that, again, this is Jim Barnes, director of fixed income. Very much enjoyed my time here with you today. If you have any questions, please go ahead and visit our website site at www.bmt.com. Thank you very much.
[AUDIO CONCLUSION/CLOSE] This has been a production of Bryn Mawr Trust copyright 2019. Visit us online at BMT.com/wealth.
The views expressed herein are those of Bryn Mawr Trust as of the date recorded and are subject to change without notice. Guest opinions are their own and may differ from those of Bryn Mawr Trust and its affiliates and subsidiaries. This podcast is for informational purposes only and should not be construed as a recommendation for any product or service.
BMT wealth management provides products and services through Bryn Mawr Bank Corporation and its various affiliates and subsidiaries, which do not provide legal, tax, or accounting advice. Please consult your legal, tax, or accounting advisors to determine how this information may apply to your own situation. Investments and insurance products are not bank deposits, are not FDIC insured, are not backed by any bank or government guarantee, and may lose value. Past performance is no guarantee of future results. Insurance products not available in all states.