Federal Reserve (Fed) Chair Jay Powell’s recent comments to Congress, and the subsequent market reaction, offered some insight into the future of monetary policy in the United States. In his semiannual testimony to the Senate Banking Committee, Powell said little that was surprising, but the comments nonetheless help investors in their efforts to understand monetary policy going forward, and how that policy could shape market behavior.

On Track…“for Now”

Broadly, Powell indicated that the Fed remains on course to gradually raise interest rates and that the economy is strong and growing at a solid pace.

As expected, the return of the business cycle and the accelerating economic growth that has accompanied it have combined to push market interest rates higher in the first half of the year. Periods of stock market volatility have resulted in temporary “flights to quality” where investors seek safe-haven assets like U.S. Treasury bonds,* pushing their yields lower and highlighting the diversification benefits of high-quality fixed income within portfolios. However, we continue to believe the long-term fundamental drivers, including economic growth, deficit spending, rising inflationary pressures, and expectations of future Federal R

Second Half Rally?

The current environment looks favorable for strong earnings and stock gains. We do expect volatility, but steady economic growth provides a strong backdrop and the potential for opportunity.

The first half of 2018 saw the return of equity volatility after the docile trading patterns of 2017. The surge in bond yields after the January jobs report, along with the initial trade concerns in late March, resulted in the first market corrections (a pullback of at least 10.0%) since the Brexit vote in June 2016. Though higher bond yields caused market disruptions, rising market interest rates (especially from relati

We believe that the global growth story will continue in 2018, with an expectation of 3.8% gross domestic product (GDP) growth for the world economy, thanks to new fiscal policies and improved business vitality. We continue to expect the U.S. economy to remain a primary driver, aided by the anticipated growth trajectory of emerging markets, while Europe and Japan may lag. Primary risks include an unexpected rise in inflation, a substantial increase in trade friction, or a policy mistake [Figure 1].

U.S. Economy Primed for Better Growth

The U.S. economy grew at a rate of 2.0% in the first quarter, in line with the