Fed, What’s next?

As widely expected, the FOMC kept the target range for the federal funds rate unchanged at 1.00-1.25%.

The market appears to have taken a very slightly dovish outlook, with the chance of a rate hike in Dec 17 slightly lowered to 40% versus 45% pre the FOMC.

What’s next ?
In this context, our rate expectations remain unchanged, where the Fed could probably announce it will begin a gradual tapering of its balance sheet reinvestment purchases relatively soon (in September) and we could see the next rate hike coming in December.
But it’s not a quiet path, indeed doubts remain about the feasibility of the Fed’s plan, because the Fed has also said that both actions are contingent on the current economic and inflation outlook. The recent decline in both headline and core inflation could complicate its task. For now, the majority in the FOMC is still downplaying this movement of inflation away from the 2% target, but if inflation data continue to disappoint the Committee, the doves are likely to gain ground in the coming months.

Pierre Boyer – Head of Money Markets – Candriam Investors Group