Market Comment: Fed remains confident

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Earlier this year, the September meeting of the US Federal Reserve was pegged as a date when the central bank would take one more step “back to normal” and hike interest rates. All, however, has not gone according to plan, and when the September meeting took place this week, there was no hike.

It was no surprise. This stall is largely attributed to stubbornly low inflation. The Fed, however, signalled yesterday that one more hike will come later this year (most likely in mid-December), and three 25 basis-point hikes are still anticipated next year. The Fed also said that a previously communicated balance sheet reduction plan would start in October.

More than markets expected

Mary Pieterse-Bloem, Global Fixed Income head at ABN AMRO, says “the Fed’s continued confidence in the inflation outlook and its inclination to raise rates one more time in 2017 is more than markets expected. US Treasury yields and the US dollar have jumped, as financial markets adjusted their view of the likely path of short-term interest rates.” 
 
Pieterse-Bloem admits to being surprised by Fed policymaker’s confidence in the near-term inflation outlook She also thinks the rate hike in December may not occur. 
 
“ABN AMRO retains the view that Fed policymakers will wait to hike rates until March 2018,” says Pieterse-Bloem.“ This is because of the possibility that inflation may continue to miss central bank targets and that the voting members of the Federal Open Market Committee may instead choose to keep interest rates lower for longer. 
 
Regarding the reduction in the Fed’s balance sheet, which was announced to begin next month, the Global Head of Fixed Income at ABN AMRO notes that it is positive that markets now have confirmation of when the gradual tapering of the reinvestment of maturing assets will start. 

Bond yields to rise

“All of the Fed’s actions are pointing to rising bond yields,” notes Pieterse-Bloem. “For me, the question is not so much the direction of yields, but how far and how fast they will go.’’ She believes that the Fed  will tread carefully, however, and not disrupt economic growth. “In a rising rate environment, ABN AMRO continues to prefer stocks over bonds.”

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