Last week, the Federal Reserve surprised virtually no one by leaving the Federal Funds rate unchanged at 0.5%. Most investors did not expect the Fed to raise rates, and just one of the 10 members of the Fed’s decision-making committee recommended a rate hike.
The Fed’s decision to hold steady on rates for the third time this year was driven by conflicting economic signals. While the most recent statement from the Fed noted that “economic activity appears to have slowed” and “growth in household spending has moderated,” it also highlighted that “real income has risen at a solid rate and consumer sentiment remains high.”
More conflicting signals about the U.S. economy’s heath came later in the week. The Fed’s concern about growth seemed justified when new data showed that the U.S. economy grew by just 0.5% in the first quarter of 2016—the slowest pace in two years (see the chart).
Despite that slowdown, inflation was surprisingly strong. The Fed’s preferred measure of core inflation rose 2.1% during the first quarter—up from 1.3% during the final three months of 2015, and higher than most investors anticipated.
A potential tailwind for equities—and Real Spend account holders
The Fed’s overall dovish tone on interest rates may act as a tailwind for equity prices in the coming weeks if investors remain bullish due to continued accommodative monetary policy. What’s more, we believe equity prices should hold up well if the slow growth seen in the first quarter turns out to be a temporary speed bump (as many investors think it is) and the economy grows at a more normalized rate going forward.
These developments (should they occur) may benefit Real Spend account holders, as Real Spend uses a predominantly equity-based approach (rather than a fixed-income-based approach) to generate growth and income in retirement.
Real Spend’s equity-centric strategy may also benefit account holders if the recent rise in inflation continues. That’s because the growth potential of equities has generally protected wealth better than fixed-income securities during periods of rising inflation.