Public Trust Advisors Blog

Top Economic Drivers of Increased Yield in 2017

Posted on Fri, Feb 23, 2018

We are two months into 2018 and experiencing steady growth from the prior year. Let’s look at the economic factors that impacted yields and recap a successful 2017. 

1. Three Federal Open Market Committee (FOMC) Rate Hikes

The Federal Funds target rate was raised three times (March, June, and December), starting the year at 0.50% to 0.75% and ending at 1.25% to 1.50%. The FOMC’s December dot plot indicated three potential rate hikes for 2018 based on the strength of the labor market and optimism that inflation will rise over the medium term.

2. Over Two Million Jobs Added in 2017

The unemployment rate dipped from 4.8% to 4.1% over the course of 2017. Non-farm payrolls added just over two million jobs in 2017, falling short of 2016’s growth but proving to be more than enough to put downward pressure on the unemployment rate and further tighten the labor market.

3. Stronger Economic Growth

The U.S. economy grew approximately 2.5% percent in 2017. Optimism regarding synchronized global growth and the impact of the Tax Cuts & Jobs Act have the markets optimistic that the U.S. economy can continue to grow at a healthy pace in 2018.

4. Positive Consumer Sentiment

Strength in the housing market, a tightening labor market, and record high stock prices have lifted consumer sentiment. With roughly two-thirds of the GDP derived from consumer spending, a healthy consumer has led to a healthy economy.

5. Low Market Volatility

With the FOMC striving for maximum transparency, the stock and bond markets remained remarkably calm over the course of 2017. Stability in the financial markets have made the FOMC’s job a bit easier (for now).

 


All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information above is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses. Performance comparisons will be affected by changes in interest rates. Investment returns fluctuate due to changes in market conditions.

Tags: Rising rates, Managing Public Funds, LGIP, Public Trust Advisors, FOMC, Short-term interest rates

Don't Fight the Fed?

Posted on Fri, Jul 28, 2017

Four times a year, members of the Federal Reserve (the Fed) release their projections for economic growth, unemployment, inflation, and the underlying interest rate associated with these forecasts. This interest rate projection, known as the “dot plot,” serves as a guide of where the Fed expects to take interest rates over time. Whenever the Fed releases an updated set of projections, it has the potential to be a market-moving event. For this reason, the recent disparity between the Fed’s dot plot and what the bond market is actually pricing into the yield curve should be of particular interest to fixed-income investors.

The saying “don’t fight the Fed” implies that investors tend to fare better when their interests are aligned with that of the Federal Reserve rather than against it. However, the bond market continues to take a less positive view of the economy than the Fed. Unfortunately for those that set monetary policy, the market’s pessimistic view has proven to be a bit more accurate for some time now.

07.17 Dot Plot.png
To illustrate, in December of 2015 the Fed raised its target rate for the first time in seven years. From the Fed’s perspective, the rate increase was warranted by the steady improvement in the labor market and confidence that inflation would gradually rise towards its 2.0% target over time. Moreover, the accompanying dot plot projected four additional rate increases in 2016. However, the bond market wasn’t buying it.
 
Source: Bloomberg

As it turns out, financial conditions rapidly deteriorated in January of 2016. At the low point in February, the possibility of even one rate hike from the Fed seemed implausible. Ultimately, we did see one rate hike in late 2016. So much for that December 2015 forecast, but the truth is that a lot has changed since the early inception of the infamous “dots.”

When the Fed first released the dot plot in January 2012, expectations for rate hikes were priced far into the future. Now, every Fed meeting is assumed to be “live” where the decision to raise rates could occur at any time. The Fed’s message has been garbled at times, but it has stressed a desire to move away from time-based forecasts to analyzing the current economic conditions before acting. For example, the labor market has recovered to its pre-crisis level, and the Fed is keenly looking for signs of inflation before pressing on with further rate increases.

While probably wise to not “fight the Fed,” we must simply realize that these dots are not carved in stone. As before, the Fed is still a bit more optimistic, and we have seen two rate increases so far this year. According to the dot plot, one more hike is projected for this year, but the market based probability for another rate increase before year end is less than 50%. Just keep in mind that either position could be correct, as it all depends on the future performance of the economy and relative stability of the financial markets.

Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

Tags: Federal Reserve, The Fed, Rising rates, Public Trust Advisors, Investing Public Funds, Dot plot, LGIP Rates, Short-term interest rates

Short-term Interest Rates: The Dot Plot Explained

Posted on Wed, May 27, 2015

By Joe Carroll, Vice President, Sales and Marketing

 

Short-term Interest Rates: The Dot Plot Explained

The Federal Open Market Committee (FOMC) is a twelve member committee consisting of members of the Federal Reserve Board and regional Reserve Bank presidents. The FOMC has eight regularly scheduled meetings throughout the year to discuss and assess economic and financial conditions, monetary policy, and risks to its long-run goals of price stability and sustainable economic growth.

One aspect of these meetings which garners a lot of attention is the dot plot. The dot plot is a visual representation of where each member of the FOMC thinks the federal funds rate should be at the end of each of the next three years and into the future (long run). While the dot plot is not an official tool of the FOMC, it does provide some insight as to what various members of the FOMC are thinking in regards to the federal funds rate.

Here is a picture of the March 18th FOMC meeting dot plot chart.

Dot Plot Blog 1

Each dot represents where individual members of the FOMC think the federal funds rate should be at the end of the year given current economic information. As seen above, the views on where the federal funds rate will be in the future varies quite a bit within the FOMC. For example, in 2016 the majority of the FOMC believes that the federal funds rate should be between 1.5% and 2.0%. There are a few members who think the rate should be much higher or lower than the consensus at the end of 2016.

Further examination of the dot plot provides even more insight into the thought process of the FOMC. The chart below shows the past three dot plot assessments along with the respective Fed Funds Futures contracts. The Fed Funds Futures contracts (seen in red) represent how the market is pricing the federal funds rate in the future. Noticeably, the market is not quite as optimistic as the FOMC. In addition to lower market expectations of the federal funds rate, it is clear that all the members of the FOMC have reduced their outlook for future interest rate levels.

Dot Plot Blog 2

The dot plot can be an insightful and useful tool when examining the federal funds rate and future projections. With recent changes in the FOMC language, we are expecting an increase in the federal funds rate sometime in 2015. Short-term interest rates have been at record lows for years. An increase in interest rates, and therefore interest income can mean a significant change for many local governments. The time for budgeting zero interest income may be coming to an end! Be sure to keep an eye out for the next dot plot and what it means to you.

 

Charts Sourced from Bloomberg

Tags: public funds investing, investment advisor, Short-term interest rates, fixed-income asset management, yield, public funds investor, Public Funds Investment, Local Government Investment Pools, safety, Investing Public Funds, LGIP Administration

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