In reaction to today’s US Federal Open Market Committee (FOMC) meeting, Lee Ferridge, head of Multi-Asset Strategy, Americas at State Street Global Markets; Antoine Lesné, head of EMEA strategy and research for SPDR ETFs; and Sophia Ferguson, senior portfolio manager for active fixed income and currency at State Street Global Advisors, offer their views.
Ferridge commented: “As was widely expected (the market was pricing a 100 per cent probability) the FOMC decided to increase rates by 25bp to 2.00 – 2.25 per cent, while leaving the door open to another move in December. Somewhat disappointingly for USD bulls, however, the FOMC refrained from adding any further tightening to its dot plot for 2019. There had been some speculation that due to strong domestic growth data and nascent signs of wage inflation the FOMC would increase its rate hike projections for the coming years. However, it appears that the uncertainty created by the escalating trade war may have weighed on FOMC thinking. The US dollar is likely to come under pressure against the recently more buoyant euro, while longer-term rates could also fall. The lack of a more hawkish FOMC message should come as some relief to emerging market currencies.”
Lesné commented: “As widely expected, the FOMC decided to raise the federal funds rate target by 25 bps to 2.00 - 2.25 per cent. The FOMC acknowledged the current strong economic momentum and rising wage inflation with balanced risks to the outlook and potential for more upside. Nevertheless a clear nod to downside risks coming from “trade wars” later in 2019 was also made, keeping the current guidance in check and giving them time to firm up a more hawkish four hikes for 2018 which the market more or less prices in already. Expect the US dollar to continue its small weaker trend which should benefit EM local currency bonds in particular. The markets continue to price another two to three hikes in 2019 with 3 per cent being the neutral rate.”
Ferguson commented: “With strong incoming data and loose financial conditions, today’s interest rate hike was a forgone conclusion. Trends in both fundamental and market based data suggest that the current cycle is three to four quarters from its peak, supporting the committee’s decision to remove references to “accommodative monetary policy” from its forward guidance and foreshadowing its intention to hike again in December. With the FOMC continuing on its well telegraphed hiking path, the US Treasury curve is likely to continuing flattening in the near-term. As the market starts to price peak rates over the next few quarters, coupled with a slowing pace of fiscal accommodation, we expect to see a gradual re-steepening of the curve.”