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Are We Just 2 Weeks Away from a Rate Hike in the US?

David Ashworth

Which Large-Cap Mutual Funds Have Done Well Year-to-Date in 2016?

Hawkishness reflected in April minutes

More often than not, it’s the FOMC’s (Federal Open Market Committee) monetary policy announcement, not the minutes of the meeting, that makes headlines. However, April 2016 was different. The outcome of the meeting was expected. It was the minutes of the meeting, released earlier in May, that were surprising.

The Fed’s hawkish tone and repeated references to June as a possible candidate for a rate hike were unexpected by market participants. A week before the release of the April 2016 minutes, the CME Group FedWatch showed that the probability of a June rate hike was 4%. As of May 20, that probability jumped to 26.3%.

A rate hike around the corner?

The minutes reflected the optimism of policymakers regarding the US economy. The condition of the job market was a primary reason for this optimism. Even though the Fed has forecast a moderation in household spending—a key driver of economic output—its members expect a bounce back in the coming quarters.

A few FOMC members have forecast improvements in financial conditions not just in the United States but globally. Had it not been for low inflation, the FOMC may have effected a rate hike in April.

Policymakers have always pointed to incoming data when changing their stances on monetary policy. Optimism notwithstanding, some factors may require the Fed to hold off on a rate hike two weeks from now. Job additions in April, which had not been released by the time the April meeting took place, were quite disappointing.

Why should you care?

A change in stance regarding monetary policy has a direct impact on fixed income funds (AMUSX) (BSV). Equities also react to rate hikes. The hawkishness displayed in the April minutes helped bank stocks such as Goldman Sachs (GS) and JPMorgan Chase (JPM), as they would benefit from higher interest rates. Meanwhile, Walmart (WMT) was hurt the most.

In this series, we’ll look at the performances of ten US large-cap equity mutual funds (FMAGX) (IEOPX). Our analysis won’t just be confined to return performance. We’ll look in depth into the portfolios of these funds and conduct attribution analyses to see which sectoral and stock picks helped or hurt the funds. We’ll also see whether active funds have done better than passive ones.

We’ll begin with the Columbia Select Large Cap Growth Fund Class A (ELGAX).

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