Is the Fed’s latest decision to leave rates unchanged truly dovish?

At its two-day meeting in late April, the Federal Open Market Committee voted to leave interest rates unchanged at a range of 0.25% to 0.50%. The Fed delivered a statement that was interpreted as dovish, but in reality it was relatively neutral, with a little something for everyone.

In the statement, the FOMC removed a prior reference to “global economic and financial developments [that] continue to pose risks,” but added new language saying that it will “closely monitor inflation indicators and global economic and financial developments.”

The FOMC also acknowledged slower growth by stating that “labor market conditions have improved further, even as growth in economic activity appears to have slowed.” Clearly, FOMC members are concerned about inflation and slow growth, but they are slightly less concerned about global developments.

The Fed’s dovishness initially came on the heels of concerns about global events, interest rate cuts and monetary policy actions earlier in the first quarter by the European Central Bank and The Bank of Japan. Collectively, such policy announcements should be supportive of U.S. risk assets, in our view, and contribute to positive technical conditions for U.S. credit markets. We think this support will take the form of increased demand for U.S. fixed-income assets, which are very attractive relative to many global fixed-income markets.

Overall, we think it makes sense to remember that monetary stimulus historically has often succeeded in providing a floor of support for risk assets. History also shows the opposite side of the equation: When stimulus is dialed back, markets react negatively to being deprived of support — particularly if they have become accustomed to a long-running sequence of significant policy actions, as is the case today.

While policy actions have generally been supportive of risk assets in the past, it is important to keep in mind that central bank stimulus may have weaker effects in the future. Part of this dilution has to do with the sheer mass of policy dollars that have been put in motion since the onset of the financial crisis. Consider that while stimulus actions in 2008 were helpful to all (or most) risk markets, the stimulus package had to get larger and larger as time went on; otherwise there was the possibility of losing a good deal of its effectiveness.

This relationship illustrates our belief that turning the dials of an existing policy program does not have nearly the same impact as the program’s original introduction does.

For a bit of context, it might be helpful to look at large-scale, long-term policy efforts that have taken shape in other parts of the world. In Japan, for instance, quantitative easing has had limited success, while inflation rates in Europe continue to remain below the ECB’s target. We believe central banks run the risk of losing credibility if investors begin to question the efficacy of monetary policies to achieve desired outcomes.

One additional point we are considering when thinking about the possible trajectory of future policy moves has to do with the variable nature of the FOMC’s messages. The FOMC has continued proclaiming its dependence on data when deliberating policy alternatives, and we think investors should therefore be prepared for rate decisions that don’t always follow a linear path.

For the most part, we believe central bankers are willing to change their views relatively quickly, particularly if economic data or financial conditions move in a significant way. Evidence of this can be seen in the recent past, beginning in September 2015, when the FOMC cited “global economic and financial developments [that] may restrain economic activity somewhat and apply downward pressure on inflation in the near term ” as a basis for staying put on short-term rates; nevertheless, the FOMC decided to raise rates in December 2015. Fast-forward to today, and we think investors can reasonably ask this question: Even though the Fed currently tilts toward a dovish bias, how soon before it changes its mind?

In light of the policy circumstances just discussed, it could very well make sense for certain investors to continue to add investment-grade corporate risk on a highly selective basis to their fixed-income portfolios. Overall, we remain cautious about the fundamental backdrop of the global economy, and we are likewise cautious about monetary policy. We have doubts that future doses of stimulative policy will have a significant effect on economic growth.

Brian M. Scotto is a vice president as well as a government and agency securities trader with Delaware Investments.