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Globaleconomicissuesfueldeflationaryfearsandhelpdrivepolicymakerstokeep
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Aftermonthsofspeculation,theFederalReservedecidedtoleaveitstargetborrowingrateunchanged,
at0%0.25%,atitstwodaymeetingthisweek.Earlierinthesummer,manyinvestorsexpectedthe
centralbanktoraiseratesinSeptemberforthefirsttimeinnearlyadecade,asU.S.unemployment
continuedtofallandGDPcontinuedtogrow.Butasinflationhascomeunderpressure,theFedelected
tomaintainitsaccommodativeposition.
ViewpointscheckedinwithJurrienTimmer,directorofglobalmacroatFidelity,todiscussthe
significanceofthedecision.

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Timmer:Essentially,theFedhadtoweighduelingforces,withglobaleconomicfearsononesideand
U.S.economicstrengthontheother.
TheFedhasadualmandatetopromotemaximumsustainableemploymentandstableprices.While
theemploymentsideoftheFedsmandatetoraiserateshasbeenmetjoblessnessfellto5.1%in
Augustinflationhasbeenlowandremainsbelowitstargetof2%.Fallingimportandcommodity
pricesandastrongerdollarhaveputmoredownwardpressureoninflation.Intheend,thefearsabout
thesedisinflationaryforceswonout.

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Timmer:Weaknessaroundtheglobedoesnt
directlyaffectU.S.retailsalesoremployment,
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butithastakenatollonmarketconditions.In
recentmonthscreditspreadshavemoved
higheroninvestmentgradecorporatebonds
andhighyieldbondsespecially,raisingthe
costoffinancing;thedollarhasmovedhigher;
andinflationexpectationshavemoveddown.
WhileeveryoneisfocusedontheFed
borrowingrate,thesemarketforcesare
actuallymoreimportantineffect,the
markethasbeentighteningfortheFed.
TheFeddoesntwantthemarkettoreacttoo
much,especiallytothepointthatitcould
hindergrowth,soithasdecidednottoraise
rates,andIexpectitishopingmarket
volatilitycalmsdown.

InsightonFeddecision
InsightfromtheFidelityAssetAllocation
ResearchteamonwhytheFeddidn'traiserates
andthingstokeepinmindintheweeksand
monthsahead.
2015Thesepresentationsareprovidedforinformational
purposesonly.
Readrelevantlegaldisclosures

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JRLQJIRUZDUG"
Timmer:NearlyeveryonewantstheFedtobeearlyandshallowmakingsmallratehikesbefore
inflationacceleratessignificantly.ButiftheFedwaitstoolongandtheinflationgeniecomesoutofthe
bottle,theymayhavetohikefaster.Rapidratemoveshavehistoricallybeenproblematicinthepast,
rapidratehikeshavetendedtosloweconomicexpansiontoomuch,sometimesturninggrowthinto
recession
MyguessisthattheFedhasconcludedthattheriskofbeingbehindinfightinginflationismuchless
thantheriskofbeingtooearly.Givenofthedeflationaryforcesintheworldtoday,theFedhasthe
leewaytowaitlonger.
IthinktheFedalsowantstoavoidsurprisingthemarket,asitdidinthetapertantrumin2013.
Typically,themarketpricesratehikescorrectlythemoveisknownanddiscountedbyinvestors
beforeittakesplace.Maybeinthreemonths,ifthemarketpricesitin,thatwillhelpmaketheFedmore
comfortablemakingachange.

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Timmer:Themarketwasnotexpectingaratehike,sothisoutcomeisexactlywhatwaspricedin.So
whilethereisoftenalotofnoiseimmediatelyfollowingaFedannouncement,thereshouldntbealot
ofmarketmovementintheshortterm.
Longterm,conditionshaventreallychanged.TheUnitedStatesremainsthebesthouseinabad
neighborhooddomesticeconomicprogressisbetterthaninmostotherdevelopedcountries.With
slowgrowth,alowrateenvironmentmaypersistforlongerthanmanyinvestorswereanticipating.
WhentheFeddoesraiserates,historysuggeststhatthefirsthiketraditionallyisn'tbeenabigproblem
forthestockmarket.Usually,theeconomy'sdoingprettywell,andweusuallyhaveabenignlow
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inflationenvironment.That'struetoday.However,whatisdifferenttodayisthatwehaveamuch
weakerglobalenvironment,inflationismuchlower,andwe'vehadalotofmarketvolatilitylately.
IftheFeddoesmovetotighteninthenearterm,it'sgoingtosqueezedollarliquidityevenmore.Inmy
view,thatcouldpotentiallybeanevenbiggerheadwindforsomeareas,likeChinaandemerging
markets,whichhavealreadybeenhitthehardest.So,myexpectationgoingforwardisthatthemarket
volatilitywe'reseeingisgoingtoremainrelativelyelevated.
Wewillgetaratehikeatsomepoint,butIdon'tthinkabigspikeininterestratesisonthehorizon,soI
thinkitstillmakessensetodiversifywithhighqualitybonds.IftheU.S.economyholdsupwell,likeI
thinkitwill,theremightbebuyingopportunitiesinU.S.stocks.

/HDUQPRUH
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Viewsexpressedareasofthedateindicatedandmaychangebasedonmarketandotherconditions.Unlessotherwisenoted,the
opinionsprovidedarethoseofthespeakerorauthor,asapplicable,andnotnecessarilythoseofFidelityInvestments.
Investinginvolvesrisk,includingriskofloss.
Pastperformanceisnoguaranteeoffutureresults.
Diversificationandassetallocationdonotensureaprofitorguaranteeagainstloss.
Investmentdecisionsshouldbebasedonanindividualsowngoals,timehorizon,andtoleranceforrisk.
Stockmarketsarevolatileandcandeclinesignificantlyinresponsetoadverseissuer,political,regulatory,market,oreconomic
developments.
Ingeneral,thebondmarketisvolatile,andfixedincomesecuritiescarryinterestraterisk.(Asinterestratesrise,bondprices
usuallyfall,andviceversa.Thiseffectisusuallymorepronouncedforlongertermsecurities.)Fixedincomesecuritiesalsocarry
inflationrisk,liquidityrisk,callrisk,andcreditanddefaultrisksforbothissuersandcounterparties.Unlikeindividualbonds,
mostbondfundsdonothaveamaturitydate,soholdingthemuntilmaturitytoavoidlossescausedbypricevolatilityisnot
possible.
GuidanceprovidedbyFidelitythroughthePlanning&GuidanceCenteriseducationalinnature,isnotindividualized,andisnot
intendedtoserveastheprimarybasisforyourinvestmentortaxplanningdecisions.
IMPORTANT:TheprojectionsorotherinformationgeneratedbyFidelitysPlanning&GuidanceCenterRetirement
Analysisregardingthelikelihoodofvariousinvestmentoutcomesarehypotheticalinnature,donotreflectactual
investmentresults,andarenotguaranteesoffutureresults.Resultsmayvarywitheachuseandovertime.
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Economiccheckin
TheU.S.economyisonsolidground,buttheglobaleconomyhasntturnedacorneryet.
Theinflationreport
Thelatestconsumerpriceindexnumbersmayhaveinvestmentimplicationsforyourportfolio.
Q42015marketupdate
Getinsightonwhatdrovevolatilityandwhymoremaybeaheadinourcomprehensivereport.
TakeawaysforQ42015
TheU.S.midcycleexpansionshouldsupportstocks;Chinasstrugglesmaydrivevolatility.
ViewallMarketsarticles

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