Slow wage growth and low inflation and only "moderate" economic growth buy the Fed more time.
An interest rate increase remains (by 1/4%) on the agenda for "later" in 2015. Possibly September, perhaps December depending on how the economic data look over the next couple of months.
"The committee continues to judge that the first increase in the federal funds rate will be appropriate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term" Yellen said.
While the Fed has made "considerable progress" toward its goal of maximum employment, " the committee wants to see evidence of further progress."
The above chart shows where individual FOMC members forecast that the Federal Funds Rate will be over the next few years.
Extrapolating that out to 2016:
We can anticipate a Fed funds Rate below 2% by the end of 2016.
When we compare that move to the move 2004-2006, it looks rather tame.
Of course there are a great many variables that (on a global scale) may impact the course of events between now and then.
What happened to US bond markets during 2004-2006?
Short-term maturities felt a greater negative impact from the increase in the Fed Funds Rate, so it makes sense to have longer-term maturities in a bond portfolio (longer duration).
As long as inflation remains at or near the prescribed target of 2% and bond investors remain comfortable with Federal Reserve monetary policy (for containing inflation), the recent volatility will likely be reduced as the inevitable rate increases for "normalization" become "built in" to expectations.
However, there is still plenty of water to flow under this particular bridge!
In the meantime, it appears that US equity market participants are "breathing easier" as there appears to be some buying support that has entered the market. However volume has been lighter and it will take some significant buying to erase the most recent downturn and return the S&P 500 to its highs.
Scott Tomenson,CIM Managing Partner, Chief Investment Strategist