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ZIRP No More

On Point

 

Key Points

  • The Federal Open Market Committee (FOMC) moved off the zero bound level by raising the Fed Funds rate range by 0.25%, to a 0.25%- 0.50% range.
  • This marks the first rate hike in nearly a decade and the first move away from the Fed’s zero interest rate policy (ZIRP) since 2008
  • Future path and trajectory of Fed Funds rate based on “actual” wage and price inflation metrics, not just anticipated.

Zero Interest Rate Policy (ZIRP) is behind us, at least for now. After a period of unprecedented monetary stimulus, and for the first time in nearly a decade, our Federal Reserve adjusted the target for the Fed Funds rate by 0.25% to a 0.25%-0.50% range, thus effectively ending the ZIRP era. There were no dissents among FOMC members, as the Fed stuck to its tradition of appearing unanimous on key committee decisions. The Fed soothed markets, emphasizing that subsequent rate hikes will be “gradual”, which leaves plenty of flexibility to raise, or not raise rates in 2016. While the Fed expects inflation to reach their 2% target, they also noted that “in light of the current shortfall of inflation from 2%, the Committee will carefully monitor actual and expected progress toward its inflation goal.” Said another way, the path and trajectory of any increase will be “data dependent”, and wage/price inflation related metrics need to be increasing for the Fed to move forward with further tightening. The reference to “actual” was viewed as dovish, suggesting the Fed will look for tangible (not anticipated) evidence prior to taking further action. The markets’ benign response to the news seemed appropriate, and confirms that the rate increase was likely already fully priced into current market levels, thus marking a victory for a central banking community concerned about the element of surprise.

The initiation of the rate hike does remove a level of uncertainty from the markets regarding a start date, and investor attention now shifts to 2016; a year that we feel will be heavily focused on both FOMC policy and the U.S. consumer. Our economy has seen wage inflation as measured by average hourly earnings improve, thus improving overall personal income levels; however consumer expenditures have not seemed to move in parallel fashion. This equation results in an increasing Personal Savings Rate. In sum, increasing wages and declining energy prices has helped the U.S. consumer, but not necessarily the U.S. economy. Rising personal income levels generally take nearly a year to influence consumer behavior. We have reached that point, the baton is being handed off to the private sector, and 2016 should prove to be a pivotal year in determining the future direction of the current business cycle.

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David M. Kirkpatrick, CFP®
SVP, Portfolio Manager

Charles A. Williams, CFP®,CTFA®
SVP, Portfolio Manager

Brian A. Barker, CFP®, AIF®
SVP, Director of Asset Management