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
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