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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 the FOMC left rates unchanged and the message from the accompanying statement was broadly unaltered, leaving the door for a hike in December widely open. The market is currently attaching a probability of over 80 percent to a December hike and the latest Federal Reserve (Fed) message will do little to change that. Even though the most recent core Personal Consumption Expenditures inflation reading for September, released on Monday, remained significantly below the Fed’s two percent target at 1.3 percent, the FOMC continues to focus on the low level of unemployment and its expectation that this will eventually lead to wage inflation. It seems it would take a major deterioration in the data – possibly starting with Friday’s labour market report – to deter the Fed from tightening in December.”
Ferguson commented, “Amidst headlines captivated by possibilities for tax reform and speculation over the appointment of the next Fed Chair, the penultimate FOMC meeting of 2017 passed with muted fanfare.
“Today’s statement did little to sharpen policy guidance, yet broadly encouraging data and strong guidance from the Fed’s leadership during the intermeeting period suggest the committee is still on track to hike for a third time this year. With market implied probabilities for a December hike hovering around 85 percent going into the meeting, investors considered an end-of-year hike to be a foregone conclusion and today’s statement gives them limited reason to question this assessment.
“The statement reiterated the economic outlook remains roughly balanced and downside risks are receding. Despite another drop in the unemployment rate and a rise in average hourly earnings growth, doggedly low inflation remains the Fed’s Achilles’ heel: the September core Consumer Price Index (CPI) print marked the sixth downside surprise in seven months.
“Although the Fed maintains that policy is not on a pre-set course and incoming inflation data will be heavily scrutinized, the absence of a strong inflationary rebound is unlikely to quell a December rate hike. The confluence of ultra-easy financial conditions, above potential economic growth, unemployment below the non-accelerating inflation rate of unemployment (NAIRU), and recent stabilization – albeit lower than desired – of headline inflation supports the FOMC’s case that the necessary economic pre-conditions are in place to resume the gradual hiking cycle.”
Lesné commented, “Unsurprisingly the FOMC stood their ground not announcing a rate hike today with all focus, instead, on the next Fed chair. We continue to believe there will be one more hike of 25 basis points in December as economic data supports the case even if inflation does not. The direction of yield may be set by the announcement of the next Fed chair. For now we would be slightly underweight duration as the backdrop is a little less supportive for US Treasuries and continue to favour investment grade credit in this phase of the cycle, potentially through intermediate maturity exposures.
