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  1. Home
  2. ECONOMY
September 17, 2015 01:00 AM

Fed keeps rates at same level

Hazel Bradford
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    Andrew Harrer/Bloomberg
    Janet Yellen

    Federal interest rates will stay the same for now at zero to 0.25%, the Federal Open Market Committee announced Thursday, with several members predicting the first hike will not come until 2016.

    Most members still predicted a hike this year, but four said it would be next year or later, up from two members at the last meeting in July. Their median projection was that the rate would reach 1.5% in late 2016, 2.5% by late 2017, and 3.5% by 2018.

    For pension funds, “the immediate effect is a positive for the asset portfolio, but you need to look at what that does to the liability of the plan. Liabilities could be growing faster than the assets today, and the net effect could be negative when considering the funded status,” said Nicholas Botticelli, a pension investment specialist at OCIO provider Hirtle Callaghan.

    The increase to four managers in predicting a rate hike later than this year was a surprise, said Brandon Swensen, co-head of fixed income for RBC Global Asset Management. “We thought they would be getting closer to consensus. … They're actually moving away from consensus. They seem to be further away from tightening than they were in July.”

    Chairwoman Janet Yellen, at a news conference following the meeting, muted expectations for the first rate hike, which she said is likely to remain “highly accommodative for quite some time. … The importance of the initial increase should not be overstated. … The specific timing of the initial increase is far less important for the economy than the entire expected path for interest rates,” Ms. Yellen said.

    FOMC members said in a statement that despite solid job gains and declining unemployment, they will continue to assess progress, “both realized and expected” before changing the federal funds rate, adding that economic conditions “may, for some time,” warrant keeping it below normal levels. All but one member voted for the policy action, with Federal Reserve Bank of Richmond President and CEO Jeffrey Lacker preferring to raise rates by 25 basis points.

    “We've seen this movie many times now,” said Matthew Stroud, head of Towers Watson's delegated portfolio management outsourced CIO platform, Americas, in an interview. “Markets were expecting it, and already pricing it in. For investors, it means nominal returns lower than many people realize for the next few years. We don't see any bargains. It means low cash rates, low bond rates and high equity valuations.”

    For Putri Pascualy, senior credit strategist and portfolio manager for Pacific Alternative Asset Management Co., “it means that the appetite for fixed-income replacement (strategy) will continue to be strong. With this uncertainty about volatility worldwide, there's going to be more concern about volatility in equity markets.”

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