By Edward Leung
News of the third US Federal rate hike in the year, although already well priced-in, had pushed US government bond yield lower. Experts expected to see a more hawkish Fed while there would be little impacts in the short run.
Only the third rate hike ever since the global financial crisis, the move had pushed the target range of Fed fund rates to 0.75- 1.0 percent.
According to FOMC’s statement, “the labor market has continued to strengthen as expected and that economic activity has continued to expand at a moderate pace. Job gains remained solid, and the unemployment rate was little changed in recent months. Household spending has continued to rise moderately while business fixed investment appears to have firmed somewhat.”
“Therefore, Inflation has increased in recent quarters, moving close to the Committee’s 2 percent longer-run objective; excluding energy and food prices, inflation was little changed and continued to run somewhat below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.”
Acknowledging improved labour market, economic sentiment and business growth, the latest Fed move had prompted experts to believe in a generally more hawkish Fed FOMC which will move at the slightest hint of economic overheating.
Lee Ferridge, head of multi-asset strategy for North America at State Street Global Markets commented, “ “This was the widely expected outcome from today’s meeting, with the FOMC sanctioning its second rate hike in three months, but leaving its guidance for rates over the remainder of 2017 unchanged. Improving real economic data, continued strong labour market gains and a rise in headline inflation set the stage for the FOMC to deliver the first of three projected 2017 tightenings.”
“Attention will now most likely shift to the June 14 meeting when many expect a further increase in rates. However, with the much talked about Trump fiscal stimulus still some way away from fruition, the Federal Reserve (Fed) will wish to see continued economic strength and, perhaps, signs of a pick-up in wages before committing to a June move. We expect a little market reaction to today’s decision given it was widely priced into markets. It will take further positive economic news to continue the push higher in US bond yields and US dollar.”
David Buckle, Head of Investment Solutions Design at Fidelity International said: “Market is still forecasting materially fewer rate rises than the Fed. I think the market is under-estimating the Fed’s perception of the risk of inflation.”
He added, “I favour selling the medium part of US curve, and being overweight risk assets for a while more yet. I’m now expecting a June rate rise too.”
The next FOMC meeting is scheduled for May 2-3. BM