Wed, 20 Sep 2017
Even with another rate hike on tap for this year, we think the normalization of rates will be a slow process.
Jeremy Glaser: As expected, the Fed stood pat on interest rates today and also announced that they're going to begin their balance sheet normalization process next month. Even though inflation remains below their 2% target, they also indicated that there will be another increase some time in 2017, and the market seems to think that's likely to occur in December.
Morningstar bank analyst Jim Sinegal thinks that this meeting and statement really are in line with his thesis of a very slow, very gradual return to normalization of the yield curve. He thinks investors should really look at long-term rates to get a better sense of what the market thinks of monetary policy, and the fact that the 10-year Treasury has really stayed at basically the same level over the last two years. Even though we've seen some economic progress, it's a sign that they do not think, and that the market isn't pricing in an overly accommodative central bank at the moment. He thinks policy is actually much closer to the neutral level than many observers might believe. But, as they begin to wind down the balance sheet, we're going to be watching carefully for the market reaction. If you remember the taper tantrum, we saw some big moves, and we'll see if we see anything similar to that when the balance sheet actually starts becoming smaller.
From an investment standpoint, Sinegal thinks the prospect of higher rates are already priced into bank stocks and that even if rates were to rise faster than expected, the stock prices already reflect this. However, he does think there's some value, such as Wells Fargo, and that that's really more tied to the improving reputation of the bank as the bank tries to improve its reputation versus more macroeconomic factors.