The official statement from the Federal Reserve Open Market Committee (FOMC) reinforced the ‘wait and see’ policy of its chair, Janet Yellen, but some content left fund professionals scratching their heads.
The fact there was not a rate hike last week came as no surprise to the market, but the cautious approach to further rate increases gleaned from the statement has caused some to ponder given that GDP growth was revised downwards and the tone of the meeting’s minutes was downbeat.
Russ Oxley, head of rates and liability-driven investment at Old Mutual Global Investors, said in a note: “This downbeat view and the lower interest-rate profile it informs, stands in particularly sharp contrast to the robust US labour market and quickening domestic inflation.”
Yellen has said many times that rate hikes will be “data dependent” but as Oxley said, US core inflation has reached levels not seen since 2012. This causes some to ask why the Fed has given a dovish statement.
The FOMC said “global economic and financial developments continued to pose risks”, which might be seen as saying that despite the US’s economic strength it is sensitive to external events.
Rick Rieder, chief investment officer of global fixed income at BlackRock, said: “The central bank must contend with payrolls growth that is likely peaking, challenging financial market conditions from abroad, and an inflation rate that appears to be firming.”
Ken Taubes, chief investment officer in the US for Pioneer Investments, said economic conditions were generally supportive of the Fed’s new forecast of two rate increases. However, he no longer believes the Fed will increase rates in April.
The consensus suggests that the Fed will continue on its rate normalisation process but there is some doubt as to how many hikes will take place this year. The majority thinks two, although the June FOMC meeting takes place one week before the Brexit vote which may have an impact on any decision.
US GDP growth was recently revised downwards from 2.4 to 2.2%.
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