On Wednesday, in his inaugural meeting as US Federal Reserve chairman, Jerome Powell as head of the Federal Open Market Committee (FOMC) raised the fed funds rate by 0.25%, as had been widely anticipated in the March rate-setting meeting.
Powell continued where his predecessor Yellen left off, reiterating the hawkishness momentum of 2017. The committee was seen to have become even more hawkish as, in its statement, it raised its growth and inflation forecasts, while at the same time lowering expectations for unemployment numbers. This has resulted in an upward revision of the expected trajectory of expectations for additional rate hikes for the remainder of the year.
On the GDP front, the committee revised its forecasts till 2019 (by 0.2% to 2.7% for 2018 and 0.3% to 2.4% for 2019). What is more significant to the markets is the upward revision of its inflation target forecast to above the 2.1% threshold. Specifically, on the committee’s rate expectations, the outcome of committee’s member’s rate dot plot is pointing towards three rate hikes for 2018.
What also emerged is that the average dot rose for forthcoming years. This is quite noteworthy, as it signifies the Committee’s persistent hawkish stance and that, as a whole, it has raised its rate path expectations, while reducing its longer-run estimate unemployment rate by 10 basis points to 4.5%.
Powell wanted to give a sense of continuity from Yellen’s tenure, and given the fact that it was the January meeting which included the greatest flavour to the markets, primarily the upward revisions to the Committee’s economic outlook, there were few changes to the March statement. But the Committee did specify clearly that the economic outlook has strengthened over recent months.
Clearly, the March rate setting was a clear sign from the Fed indicating an upward shift in rate trajectory over the short-medium term, as the Committee now expects at least one more rate hike till 2020 than it had been previously anticipating. The Committee is however split as to how many rate hikes should be expected this year; six members voted in favour of three hikes, whereas the other six wish there to be four rate hikes in 2018.
What is going to be critical for markets is the evolvement and of inflation prints from this point forth till the summer months. More specifically, rather than the actual numbers, would be the absolute magnitude of change in data prints which could dictate market sentiment and will give us a clearer indication on how the FOMC is expected to act in its rate setting meetings for the remainder of 2018, and how this could impact both equity and credit markets. Markets are currently seemingly pricing in an additional three rate hikes this year.
Indeed, interesting months to come, when we have global trade tensions being imposed by the US on a number of large economies. The US president is effectively expected to announce about $50 billion worth of tariffs against China over what is being cited as ‘intellectual-property’ violations.
Disclaimer
This article was issued by Mark Vella, investment manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.