The Fed took out an insurance policy in order to stay on a rate hiking path. A shallower path of rate hikes should temporarily ease pressure on the U.S. dollar and help improve financial conditions.
Bond investors should take cues from the TIPS and credit markets. The Fed wants to see tighter credit spreads and higher inflation expectations before raising rates much more.
We view investment-grade corporate bonds and commercial mortgage-backed securities as attractive sources of income in this environment.
The Federal Reserve took a distinctly dovish turn at last week’s FOMC meeting, reducing its expected rate increases for 2016 from 1% to 0.5%. This reduction came alongside a more cautious outlook for both growth and inflation in the U.S. It looks like the Fed took out an insurance policy in order to stay on a hiking path. This reminds us a lot of the FOMC meeting last September at which the Fed delayed its expected rate hike in response to recent market volatility. A shallower path of rate increases should temporarily ease pressure on the U.S. dollar and help improve financial conditions. In a global context, however, positive-yielding government assets are quickly evaporating (Exhibit 1).