What to expect at the upcoming Fed meeting

On the latest edition of Market Week in Review, Senior Investment Strategist Paul Eitelman and Sophie Antal Gilbert, head of AIS business solutions, discussed what to expect at the U.S. Federal Reserve (the Fed)’s next policy meeting. They also chatted about the impact of recent Brexit developments on financial markets and dug into the latest data on eurozone industrial production.

All eyes on Fed rate outlook at mid-week meeting

The Fed convenes March 19-20 for its next monetary policy meeting, Eitelman said, noting it’s pretty much a slam-dunk that the central bank will keep interest rates unchanged. “The Fed has been overly clear about its intent to pause its rate-hiking cycle,” he said, “so the importance of the meeting, from a market perspective, will revolve around guidance from the central bank on how long the pause may last.”

At the conclusion of the meeting, the Fed will release an updated set of interest-rate projections, and markets will gain a better sense of how many FOMC (Federal Open Market Committee) members favor another rate increase this year, Eitelman said. “This, combined with Chair Jerome Powell’s press conference after the meeting, should paint a more comprehensive picture of how significant the central bank’s recent shift in monetary policy has been,” he stated.

The Fed signaled a pause in rate hikes at its last meeting for three main reasons, Eitelman said:

• The sell-off in markets during the fourth quarter of 2018
• A slowdown in the global economy
• Sluggish inflation

Markets have responded by generally posting strong gains, he noted, while tentative signs have also emerged that global economic growth may be on the upswing. Meanwhile, inflation has generally remained weak, Eitelman said—as evidenced by a 1.5% year-over-year increase in the Labor Department’s Consumer Price Index in February. This suggests that the Fed’s primary inflation indicator, the core personal consumption expenditures price index, may come in below the central bank’s 2% target.

“The ongoing softness in inflation has led to speculation in markets that the Fed may hold off on rate increases for longer than originally thought,” Eitelman explained, adding that he and the team of Russell Investments strategists now believe the central bank probably won’t hike again until December.

Potential Brexit delay relieves markets

Shifting to Brexit, Eitelman noted that it was a busy week for lawmakers in the UK, with Parliament first turning down Prime Minister Theresa May’s latest Brexit deal proposal on March 12. This was followed on March 13 by a vote rejecting a no-deal exit from the European Union (EU). “The outcome of this vote was received well by markets,” Eitelman said, explaining that it helped to remove some of the downside risks of Brexit.

The final vote of the week came on March 14, he said, when Parliament approved a motion to postpone the UK’s departure date from the EU, currently scheduled for March 29. The EU will now need to agree to this delay, Eitelman said, noting that May will request this of EU leaders at a March 21 meeting in Brussels. “Ultimately, a potential delay and the elimination of a no-deal Brexit create some blue sky in the near-term,” he remarked, “and both represent incrementally positive steps from a market perspective.”

Eurozone industrial production: On the rebound?

Turning to Europe, Eitelman said that recently-released industrial production numbers from the eurozone may indicate signs of green shoots in the region’s economy, which has generally disappointed over the past year. Data from Eurostat showed that industrial production increased by 1.4% in February from a month earlier—“a very nice rebound, even with some continued weakness in Germany,” he noted.

Eitelman believes that the eurozone may be able to achieve a 1.5% real GDP (gross domestic product) growth rate if some of the more positive recent trends continue—and if the German economy is able to bounce back as well. “Our team of strategists believe that Germany has the potential to recover this year,” he said, noting that the country has been beset by several transitory issues, including tougher environmental standards that slowed automobile production as well as low water levels on the Rhine that disrupted chemical production. These headwinds, Eitelman noted, seem to be largely dissipating.

“Overall, we continue to be satisfied by the recent fundamentals we’re seeing in Europe,” he said, “and, coupled with the region’s more attractive valuations, we believe there’s some potential opportunities there.”