Dovish commentary this past Wednesday from Federal Chairman Jerome Powell was just what the doctor ordered for both the equity and bond markets. Backing off of comments made a couple of months ago, the Fed Chair stated that Fed policy was closer to the neutral rate, in which Fed policy is neither too accommodative or too restrictive. While we still believe the Fed will raise in December, this gave markets some relief on the prospect of future rate hikes by the Fed, which has been a source of concern for many market participants who have felt the U.S. economy was still fragile and could be derailed by an aggressive Fed rate policy.
We liked the comments from the Fed and their reiteration that they will remain data dependent. The U.S. economy is in good shape for the moment with historically low unemployment levels, no threat of runaway inflation, the fear of a slowing global economy, a looming potential trade war, quantitative tightening, and a mild correction in housing. All these factors support keeping interest rates low for longer.
With the 10-year Treasury trading right above 3%, we are biased toward locking-in interest rates given the move lower. President Trump and President Xi will meet this weekend at the G-20 to hopefully resolve the trade tensions. Should the meeting surprise to the upside, rates could quickly move up on any positive news.