Having effectively backed itself into a corner to pull the trigger in December, the Fed unsurprisingly left rates unchanged yesterday. Aside from a stronger job market, US economic activity remains mixed (for example, durable goods orders fell -5.1% in December versus market calls for -0.7%) and as we are all aware, inflation is tracking below their 2% target. Sounding relatively upbeat about the state of the domestic economy, the data dependant Fed added that any policy decisions will now also be tied to markets; stating it will be “closely monitoring” global economic and financial development.
Fickle markets appeared to want more colour from the Fed, remaining directionless post the FOMC’s more dovish announcement; equity markets closed lower, US Treasury yields were flat to slightly lower and the dollar traded within a very tight range (closing lower on the day). Broadly, emerging markets have reacted positively to the statement, enjoying the risk-on bounce today; the yield on Saudi Electricity 5.06% 2043 has fallen ~15 basis points to 6.55%, meanwhile Pemex 6.625% 2035 has rallied over two points, trading at an attractive risk-adjusted spread of 535 basis points over Treasuries (at time of writing).
Markets are looking to the next meeting in March, where futures are pricing in a 14% probability of a hike, down from ~25% on Monday. At the beginning of the year the Fed median estimate was for 4 (or more) hikes in 2016, the market is however pricing in only one rate hike this year. We doubt that current market turmoil will improve markedly to warrant a hike in March and reiterate our more bearish stance to global growth. Our expectation is for the Fed Funds rate to be lower than 1% by the end of 2016.