Now that the Federal Reserve has increased the Federal Funds rate for the first time since 2006, advisors and their clients are wondering how the Fed will act — or not act — as the new year begins. How will the hike impact the broader fixed income markets? What will future rate increases for 2016 look like?
Russell Investments used its Economic Indicators Dashboard to track some of the most relevant indicators to pay attention to in 2016.
"With the Fed Reserve's decision to raise interest rates in December 2015, the market will likely look for clarity about the timing, frequency and magnitude of future rate increases for 2016," Frank Pape writes in Russell's Helping Advisors Blog. "The pace of job creation and inflation will likely be key indicators for investors to watch, weighing heavily on the Fed's decision to raise rates during the year." (See Who Wins, Who Loses as Rates Rise.)
According to Russell Investments' Economic Indicators Dashboard, these are the three most relevant economic indicators to watch heading into 2016.
Yield Spread
The yield spread, which measures the yield difference between the 10-Year U.S. Treasury Note and the 3-Month Treasury Bill, is one key indicator to watch, Russell says.
"With the recent media attention on the Federal Reserve and interest rates, it's worth noting that the Fed only has a direct impact on the short end of the yield curve which is represented as the Federal Funds Rate (the interest rate paid by high quality financial institutions to borrow and lend money overnight)," Pape writes. "The Fed hopes to influence the longer end of the curve in different ways."
According to Pape, "one possible and widely shared belief" is that the Fed will make additional rate increases to the Federal Funds rate in 2016.
If the Federal Reserve increases rates in 2016 and other major economies in Europe, Japan and China keep their interest rates low, then the demand for U.S. Treasuries will be something to watch in 2016, Pape notes.
Inflation
Inflation will continue to be a gauge used by the Fed, as it considers possible future interest rate increases. Russell's Economic Indicators Dashboard tracks the Consumer Price Index, which includes the impact of energy prices.
Right now, cheap energy is contributing to keeping inflation at historical lows.
