29th January 2015
Schroders US fixed income portfolio Manager Lisa Hornby takes a look at yesterday’s Federal Open Market Committee (FOMC) statement…
The January FOMC statement was relatively unchanged compared to the December statement. Comments added into the January statement were mostly balanced and reflected awareness of “international developments”, falling near-term inflation as well as the fact that domestic growth has improved from a “moderate” pace” to a “solid” pace.
The Federal Reserve (Fed) also mentioned that they view the impact of falling energy prices as boosting “household spending power” and that they expect inflation to rise towards their goal of 2% in the medium-term.
The Treasury market has initially interpreted this statement as being more dovish, and suggestive of the Fed keeping zero rates for a longer period. The 10-year Treasury bond has rallied 10 basis points to 1.72% and the first rate hike is fully priced into the Federal Funds market in December 2015 (in December 2014, the market expected the first rate hike to be in June 2015).
Our view is that the statements will become gradually less dovish as we progress throughout the year. Although officials are signalling that they will be “patient in beginning to normalise the stance of monetary policy”, a June 2015 hike is still on the table. We believe that the Fed is aware of the risks to financial stability of keeping policy too accommodative, especially in the face of an unemployment rate of 5.6% and core inflation of 1.4%. The removal of the “considerable time” verbiage is evidence of this gradual shift in stance.