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March 2017

Investment insights

The market remains out of sync with the Fed

By David Buckle, Fidelity's Head of Investment Solution Design
 
The Fed raised rates by 0.25% on Wednesday, as expected. The two changes in the statement both referred to inflation, but do not indicate a policy change.

Fidelity’s Head of Investment Solutions Design, David Buckle, was struck by Yellen’s air of assuredness and confidence. She appeared relaxed with a clear picture in her head as to how this normalisation will play out. David believes there likely will be three hikes in 2017 at a minimum, and as many as four. He also believes there is very little chance there will be only one more rate hike.


Changes in the Feds statement
There were two changes, both referring to inflation:

1) The Fed said inflation will “stabilise” at 2%, whereas it had previously said it will “rise to” 2%.
As the Personal consumptions expenditure price index is only at 1.7%, Buckle is interpreting the change as hawkish, as Yellen must feel like inflation is close enough to 2% to be considered at target.

2) The statement introduces a new line: “The committee will carefully monitor inflation developments relative to its symmetric inflation goal”.
David believes that by referencing “symmetric”, the Fed is trying to avoid the perception of an inflation ceiling. However, this should not be viewed as dovish. From her press conference comments, Yellen was trying to hint to markets that she wouldn’t respond to higher inflation with unnecessary rate rises.

Changes to the Fed’s projections
The Fed’s projection of interest rates have two interesting features:
1) The participants have become more consolidated in the view of two more rate rises this year, with increased risk of three.
2) The projections for 2018 and 2019 have risen, with a median forecast of 3% interest rates by 2019. 

Although Yellen said the upward adjustment should not be read as a change, David believes that it shows the committee is becoming more unified around the notion of a recovery - the doves are dwindling.

Key takeaways from Yellen’s Q&A session
• Yellen was bullish on the economy.
• Fed’s projections do not factor in Trump’s fiscal stimulus, which means economic projections could rise further.
Yellen said the Fed is closer to its objectives, which suggests she is happy to continue raising rates at this pace.
One rate rise per meeting was said to be too quick, risking a downturn in financial markets and the economy.
Dollar strength could slow monetary tightening, unless it was driven by Trump’s proposed border tax.
No plan for balance sheet unwinding.

David Buckle’s Opinion
The market is still forecasting materially fewer rate rises than the Fed.
The market is under-estimating the Fed’s perception of the risk of inflation. 
Favours selling the medium part of US curve, and being overweight risk assets for a while more yet. 
Expects a June rate rise

 

 
This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International.


This document is intended for use by advisers and wholesale investors. Retail investors should not rely on any information in this document without first seeking advice from their financial adviser.  You should consider these matters before acting on the information.  You should also consider the relevant Product Disclosure Statements (“PDS”) for any Fidelity Australia product mentioned in this document before making any decision about whether to acquire the product. The PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading it from our website at www.fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. This document is intended as general information only. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Reference to ($) are in Australian dollars unless stated otherwise. 

© 2017 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL Limited. 

This website is intended to provide general information only and has been prepared without taking into account your objectives, financial situation or needs. You should consider these matters before acting on the information and consider the relevant Product Disclosure Statement for any product named on this website before making an investment decision.

© 2017 FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340.
Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL limited.

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 ("Fidelity Australia"). Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International. Prior to making an investment decision retail investors should seek advice from their financial adviser. Please remember past performance is not a guide to the future. Investors should also obtain and consider the Product Disclosure Statements ("PDS") for the fund mentioned in this document. The PDS is available on www.fidelity.com.au or can be obtained by contacting Fidelity Australia on 1800 119 270. This document has been prepared without taking into account your objectives, financial situation or needs. You should consider such matters before acting on the information contained in this document. This document may include general commentary on market activity, industry or sector trends or other broad based economic or political conditions which should not be construed as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be construed as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care no responsibility or liability is accepted for any errors or omissions or misstatements however caused. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity funds is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. References to ($) are in Australian dollars unless stated otherwise. © 2017 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International, and the Fidelity International logo and F symbol are trademarks of FIL Limited.