The Fed's Rate Hike: Substance and Style

The Fed's Rate Hike: Substance and Style

Chairman Powell's FOMC was brief, clear and optimistic; trade relations between the U.S. and China remained challenging; Europe's central bank shared its playbook for the next year and more; Russia and Saudi Arabia met about oil and more.

“Various factors have deteriorated my credibility as president of the central bank”
Frederico Sturzenegger, resigning as head of Argentina’s central bank in the wake of the rout of the Argentine peso.

Fed Rate Hike: Substance and Style Chairman Powell’s post-meeting press releases are both informative and brief, with a focus on the intentions of the FOMC as well as its actions. The all-but-guaranteed two rate hikes for the rest of 2018 were clearly described as a minor adjustment due to economic strength, and a welcome move toward a more economically neutral rate than has been in place since the 2007 Global Financial Crisis.

Financial markets seemed to get the message; the carefully-scrutinized yield for 10-year U.S. Treasuries spiked briefly to 3.0069%, but has been headed downward since then, suggesting a slightly reduced fear of inflation – at least over the ten-year time frame. As of 11:07 AM on Friday, June 15, the indicated yield was 2.9022%. The 5-year 5-year break-even inflation rate remained at roughly 2.1%, staying well within its 2.25% to 1.95% trading range, where it has been since mid-January 2018.

The Fed’s continued efforts to reduce its balance sheet were also mentioned. In that vein, the FOMC’s slight adjustment of the interest it pays its member banks to leave deposits with the Fed (now at 1.95%) may have been intended to encourage depositors to seek better returns outside the Fed’s own balance sheet.

Meanwhile China’s central bank decided to leave its benchmark rate unchanged as a means of continuing its support of the economy, rather than following U.S. rates higher.

China-U.S. Trade: More Confrontation Friday saw the White House release a list of hundreds of additional proposed items for its proposed $50 billion in increased tariffs on China. These wouldn’t take effect immediately; they are subject to the same review and approval process as the previous, shorter list. China’s Ministry of Commerce responded immediately with a tariff proposal of its own, along with a restatement of its policy favoring free trade.

Europe’s Economy: ECB Declares Gradual Victory
In light of the current weakness in Europe’s economy in Q2, a continued policy of accommodation was welcome. But unusually, the ECB’s monthly press conference featured President Mario Draghi as a model of clarity and specificity. A gradual end to its ultra-accommodative bond-buying program has been scheduled; €45 billion, the current level, for September, then a €15 billion reduction each month in October, November and December 2018.

Interest rates would remain at their current levels at least through the summer of 2019, or longer if needed. Debt remaining on the ECB’s balance sheet would continue to be reinvested “for an extended period” after the end of December 2018.


Global Oil: The Meetings Will Continue Until… In advance of the upcoming OPEC meeting this coming Friday, Saudi Oil Minister Khalid Al-Falih met with his Russian counterpart in the shadow of the Saudi-Russian World Cup match between their nations’ teams – as did Russian  President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman. Minister Al-Falih stated that a decision to increase OPEC and allied production was “inevitable”. On the other hand, he also said he expected Saudi Arabia to win the match in a “very tight game”, which the Russian team won 5-0.


All data Source: Bloomberg, on their specified dates and times.


The Federal Open Market Committee (FOMC) is a policy-making body of the Federal Reserve System (the Fed) responsible for the formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.


U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.

Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.

Important Information


All investments involve risk, including possible loss of principal.

The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested. 

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.

International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.

Past performance is no guarantee of future results.  Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.

The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).

This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc.  Unless otherwise noted the “$” (dollar sign) represents U.S. Dollars.

This material is only for distribution in those countries and to those recipients listed.

All investors and eligible counterparties in Europe, the UK, Switzerland:

In Europe (excluding UK & Switzerland) this financial promotion is issued by Legg Mason Investments (Ireland) Limited, registered office 6th Floor, Building Three, Number One Ballsbridge, 126 Pembroke Road, Ballsbridge, Dublin 4, D04 EP27, Ireland. Registered in Ireland, Company No. 271887. Authorised and regulated by the Central Bank of Ireland.

In the UK this financial promotion is issued by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London, EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorised and regulated by the UK Financial Conduct Authority.

In Switzerland, this financial promotion is issued by Legg Mason Investments (Switzerland) GmbH, authorised by the Swiss Financial Market Supervisory Authority FINMA.

Investors in Switzerland: The representative in Switzerland is FIRST INDEPENDENT FUND SERVICES LTD., Klausstrasse 33, 8008 Zurich, Switzerland and the paying agent in Switzerland is NPB Neue Privat Bank AG, Limmatquai 1, 8024 Zurich, Switzerland. Copies of the Articles of Association, the Prospectus, the Key Investor Information Documents and the annual and semi-annual reports of the Company may be obtained free of charge from the representative in Switzerland.

All Investors in Hong Kong and Singapore:

This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.

This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.

All Investors in the People’s Republic of China ("PRC"):

This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC.  The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC’s commercial bank in accordance with the regulation of China Banking Regulatory Commission.  Investors should read the offering document prior to any subscription.  Please seek advice from PRC’s commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only.  Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.

This material has not been reviewed by any regulatory authority in the PRC.

Distributors and existing investors in Korea and Distributors in Taiwan:

This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.

This material has not been reviewed by any regulatory authority in Korea or Taiwan.

All Investors in the Americas:

This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.

All Investors in Australia:

This material is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827) (“Legg Mason”). The contents are proprietary and confidential and intended solely for the use of Legg Mason and the clients or prospective clients to whom it has been delivered. It is not to be reproduced or distributed to any other person except to the client’s professional advisers.