State Street Comments on Federal Open Market Committee Meeting

In reaction to today’s US Federal Open Market Committee (FOMC) meeting, Lee Ferridge, head of multi-asset strategy for North America at State Street Global Markets, 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, Janet Yellen’s final meeting as Chair of the Federal Reserve (Fed) (and as an FOMC board member) proved to be a non-event. Interest rates, the balance sheet reduction program and the accompanying statement were all left unchanged. A move at the next meeting in March is now 85 percent priced into the market and we see little reason to disagree. Such a lack of reaction to Fed meetings could become the norm in 2018. With three hikes predicted by the Fed “dots” and the market broadly in agreement, it would take a significant divergence in either the economy and/or inflation to change the expected 2018 path. Such divergence looks unlikely at this stage. We suspect the tax reform package will do little to boost aggregate demand, leaving growth in the low twos while, as has been the case for many years, real consistent inflationary pressures remain hard to find.”

Ferguson commented, “With the Fed’s rate hiking cycle well underway, Chair Yellen’s final FOMC meeting passed with little fanfare. Economic data during the intra-meeting period evolved in line with the December outlook and financial markets priced in a March rate hike with certainty.

“Recent economic data remains consistent with the FOMC’s proposed hiking path for 2018, but the key question for the FOMC over the upcoming year will be just how far to raise rates. While the impact of the tax package on monetary policy has garnered significant focus as of late, faster and more aggressive rate hikes are necessary only if fiscal policy boosts demand enough to deliver an upward surprise to growth and a downward surprise to unemployment. We do not view tax policy as boosting aggregate demand; rather, a supply side story with limited inflationary impulse. Given limited inflationary pressure and a significantly flatter yield curve, we eagerly await the discussion recounted in the meeting minutes, released on February 21, to glean insight on potential debate on the rate normalization outlook or alternative monetary policy frameworks.”

Lesné commented: “No unexpected surprises from FedChair Janet Yellen’s last meeting. Focus will be on March and Jerome Powell’s first meeting as Fed Chair. A move is more or less priced in already. The statements will prove to be of little impact to alter the course of these expectations.
The market is currently pricing a possible three hikes and the US treasury curve may become flatter throughout the year unless inflation surprise as a result of the tax package impetus. ETF investors have shown appetite to manage this flatness through an exposure blending short and long dated US corporate bonds.”