Schroders Quickview: Fed reiterates rate hike stance

The Federal Reserve (Fed) has reaffirmed its view that it will likely raise rates twice before year-end, while subtly signalling an even more gradual rate hiking trajectory. Not only did the median (and mean) interest forecasts (“dots”) move down for 2016 and 2017, but there are now more members in the “one hike only” in 2015 camp compared to March. The median estimate for the longer-run normal funds rate was unchanged at 3.75%.

The Fed’s statement acknowledged the transitory nature of the weakness in first quarter growth and affirmed expectations for a moderate pace of GDP growth going forward. The Federal Open Market Committee continues to see reductions in labour market slack.  Assessments of consumer spending and housing were more positive than before, although business investment and net exports were still described as “soft”. The Committee also noted concern about international developments as well as the lack of wage growth in the US economy.

The Treasury market rallied as the headlines were released and the yield curve steepened. Due to a continued period of accommodative monetary policy, we would expect risk assets to outperform and the Treasury yield curve to continue to steepen. Inflation-protected securities should outperform as well, given the Fed’s continued focus on returning inflation towards the 2% monetary policy target.

Overall, the statement was generally in line with our expectations. We continue to believe that lift-off in the Federal funds rate will occur at the September meeting.

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