As was widely expected, today the Federal Reserve (Fed) raised the Federal Funds Target rate by 25 basis points (bps) to a new range of 0.25% to 0.50%. The rate hike reflects Chairwoman Yellen’s and the Fed’s confidence in the U.S. economic recovery….
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Chairwoman Yellen reaffirmed that the Fed is forward thinking in raising rates as monetary policy acts with a lag. They fear that if they were to wait too long, and then have to tighten too quickly, they will risk disrupting the market. Therefore the current path of gradual normalization is required so as to not destabilize the economic recovery the Fed has worked so hard to engineer. It is important to recognize that despite this move, monetary policy remains highly accommodative with the Fed continuing to reinvest the maturing assets on its balance sheet. Importantly, the Fed’s statement specified the path of future hikes will be based upon a wide range of information including readings on financial and international developments.
Chairwoman Yellen cited considerable economic progress – especially in employment data – along with the expectation that currently weak inflation is indeed transitory, as rationale for today’s modest rate increase. The Fed’s summary of economic projections remained largely unchanged. It did, somewhat surprisingly, raise its 2016 economic growth estimate, as measured by GDP, to 2.4%, up from the previous 2.3%. At the same time it slightly lowered its 2016 inflation forecast – as measured by its favored gauge – to 1.6%. The Fed’s expected trajectory of rate hikes remains unchanged for 2016.
It is our view that the difference between Fed and market expectations merits close monitoring over the next several quarters.
We recognize this rate hike raises the question of how will long-term rates be affectted.
We believe global deflationary pressures, including weak commodity prices, decelerating growth in key emerging markets, demographic trends and a strong U.S. dollar should keep long-term rates relatively contained.
As we have communicated for several quarters, our fixed income portfolios have been defensively positioned. We remain concerned about divergent monetary policies among advanced economies, stretched valuations across many fixed income sectors, nearing the end of the credit cycle, and low levels of market liquidity. Security avoidance will continue to be a key driver in delivering risk-adjusted returns and capital preservation for clients. Importantly, we believe our defensive stance positions us to act as a provider of liquidity so that we can opportunistically step into dislocations and purchase attractively priced securities.
Key Takeaways
– Monetary policy remains highly accommodative.
– The difference between Fed and market expectations on growth and inflation merits close monitoring over coming quarters.
– Rising rates reinforces our defensive stance, as do other factors such as diverging global monetary policy, a peaking credit cycle and low market liquidity.
Fonte: BONDWorld.it
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