In reaction to yesterday’s US Federal Open Market Committee (FOMC) meeting, Lee Ferridge, head of multi-asset strategy for North America at State Street Global Markets; and Sophia Ferguson, senior portfolio manager for active fixed income and currency at State Street Global Advisors; and Antoine Lesné, EMEA head of ETF strategy at SPDR ETFs, part of State Street Global Advisors offer their views.
Ferridge commented, “As widely expected the Federal Reserve (Fed) raised rates by 25bps at its December gathering, the third such hike in 2017. Given the market was pricing in a 98 percent probability of such a move, it came as little surprise meaning little market reaction is expected. Also in line with expectations, the FOMC left its dot plot for rates in 2018 and 2019 unchanged. While, following its November gathering the Fed described inflation (excluding food and energy) as “soft”, continued strong real economic data left little doubt over a December tightening. The Fed’s expectation that wage inflation must soon materialise given extremely low unemployment rate also means it remains confident of delivering further hikes in 2018. Indeed, we have seen some pick-up in inflation expectations of late and our PriceStats1series shows online prices gathering momentum once again in recent weeks.”
Ferguson commented, “With Fed funds futures pricing in nearly a 100 percent probability of a hike at today’s FOMC meeting, the Fed’s decision to raise the target rate by 25bps to 1.25-1.5 percent came as little surprise. With the unemployment rate remaining at all time low levels, the Fed maintains a strong belief that the Philips Curve paradigm will eventually resume. Viewing near-term risks to the outlook as “roughly balanced,” the Fed will continue to monitor inflation data, but maintain conviction that the shortfall cannot be maintained over the medium term given the strength of the labour market and growth outlook.
“Economic conditions throughout the quarter have evolved largely in line with the committee’s expectations. While the 2018 growth outlook was revised up to 2.5%, the long-run growth forecast remained unchanged at 1.8%. The committee continues to forecast three rate hikes in 2018, but there is a possibility that these estimates could be revised upward once details of the latest tax bill are fully incorporated into economic projections. While fiscal policy may continue to support above trend growth, we do not expect the provisions to meaningfully change the monetary policy outlook or inflation profile.”
Lesné commented: “In line with expectations, the Fed hiked by 25bps for its last meeting of 2017. The FOMC also left its projections for future rate hikes unchanged in 2018 and 2019. Focus on inflation remains the centre of the FOMC’s attention as strong real economic data continues to abound and unemployment reaches very low levels. Against this backdrop we expect yields to remain well behaved. As this event is now behind us the recent rise in short term interest rates should relent and could begin to fall as investors start to short term bonds, driving their yields down and leading to some steepening of the treasury market yield curve.
“Meanwhile we will have to wait for the Fed’s Jerome Powell to take on his role to reassess potential changes to the projections and inclusion of any meaningful windfall from the US tax reform.”