Opportunity to float

Opportunity to float

Today we received the highly anticipated announcement from the Federal Reserve that short term interest rates will remain steady, at least for now. Fed Chairwoman, Janet Yellen, cited economic challenges in China, a stock market adjustment, low oil prices and low inflation as key reasons as to why they ultimately decided to hold off on raising rates. Although there has been significant improvement in both the housing market and the job markets, there remains a great deal of risk to economic growth as well as to inflation. She stated that the Fed would like to hold off to see if the economy and inflation pick up in the near term before raising rates.

Janet Yellen still feels there is a relatively high probability that we will see a rate hike at some point prior to 2016. This is based on a vote of each of the members of the Fed. There are some voting members who believe that a rate hike should not be on the table, and that additional stimulus is needed to ensure the US economy continues to grow at a healthy pace and that inflation moves closer to their target of 2% per year growth. However, other members expressed concern that by the time they realize inflation is moving towards their objective, the pace of inflation will be too strong to slow down without taking drastic measures. That would result in more aggressive rate hikes in the future. A look back on the history of the Fed shows that they typically surpass the ideal time to begin the process of raising rates. However, if they act too quickly they will jeopardize the growth and improvements that they have already achieved.

Mortgage bonds have improved dramatically on the news. Bond prices are now back into their tight sideways channel that they maintained for weeks. There is opportunity to float to see where the bond rally ends. However, if you choose to float, the potential improvement may be minimal and should only be risked if you are keeping your eye on the market. Fed Days typically create high levels of volatility. Therefore, sentiment can reverse quickly.