A few moments ago we learned that, as expected, the Federal Reserve left interest rates unchanged exiting its April Federal Open Market Committee meeting. Within the first few lines of the press release, the Fed said "growth in economic activity appears to have slowed" and "growth in household spending has moderated."
From our perspective, it sounds like the Fed saw the same rash of economic data that we have since Fed Chairwoman Janet Yellen last discussed monetary policy, with the data pointing to a slowing domestic economy. We've talked about this week in and week out as part of the challenging growth environment that we have seen as we look for opportunities for our Growth Seeker portfolio. The best visualization of this slowing domestic economy is found in the negative slope of first-quarter GDP expectations as tracked by the Atlanta Fed's GDPNow (see chart below).
In our view, there was little way for the Fed to talk its way around that issue.
The Fed's commentary also touched on inflation -- the other supposed key driver of Fed policy decisions. In short, the Fed, much like most of us, isn't seeing any meaningful uptick in inflation. We will continue to look for signs of inflation on both commodities and other inputs, including wages. Concern about the latter stems not so much from the tone of the jobs market, but rather the ripple effect associated with rising minimum wages.
Closing out the Fed's prepared remarks we found the following:
The FOMC expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
In other words, the Fed expects to remain accommodating to the economy, and any next rate increase will remain, to use Janet Yellen's catch phrase, "data dependent."
This means the next few months will be closely watched ahead of the Fed's next policy meeting this June. Based on the current vector and velocity of global economy and corresponding economic data, as well as other factors that include an election here at home and the latest round of monetary stimulus initiatives by the European Central Bank plus chatter that more is on the way from Japan and China, we see the Fed holding off boosting rates until later in 2016 at the soonest.
From a stock perspective, we see this continued dovish view as well as the tepid economic commentary giving renewed life to dividend-paying companies, particularly those with enviable dividend yields such as AT&T (T) at 5.0% and Verizon Communications (VZ) with its 4.4% dividend yield. Other beneficiaries include real estate investment trusts, such as Physicians Realty Trust (DOC) and Omega Healthcare Investors (OHI), that capitalize on what we call the Aging of the Population, and data center REITS such as DuPont Fabros (DFT) and Equinix (EQIX) that are feeling the Connected Society tailwind on their businesses.