The Daily Update - A Rather "Dovish" FOMC Meeting

As has been well publicised and priced in by the market, the Fed hiked rates by a further 25bps yesterday, to 1.50-1.75%. As we mentioned yesterday, with this being Jerome Powell’s first FOMC address, markets were clearly keen on hearing what he had to say, especially after the latest core PCE and core CPI releases disappointed. Also, other key data points have remained mixed; retail sales, building permits and personal consumption have all surprised to the downside. Also of interest is the Atlanta Fed’s Q1’18 GDPNow estimate which has fallen to 1.8%; from as high as 5.4%, on February, 1.

In terms of key features, Mr Powell highlighted the strengthening economic growth and unemployment forecasts; with growth estimated to come in at 2.7% this year, 2.4% in 2019 and 2% in 2020; off the back of recent fiscal measures. Meanwhile, unemployment is forecast to drop to 3.8% by the end of this year, further falling to 3.6% in the subsequent two years. Inflation expectations, however, were only revised slightly higher at 1.9%, 2% and 2.1%, respectively. What is interesting here is that the Fed appear comfortable with an inflation overshoot in 2020; the previous message from Yellen and Chicago Fed President Evans was, unless price pressures appear “persistent” the Fed would not try halt inflation at 2%.

The key takeaway is that Powell appears to be sticking with his predecessor’s gradual and more flexible approach to normalising rates; he reiterated that there is little upside risk to inflation currently. The more dovish tone, with no change to the median dot plot this year (still three hikes), saw the dollar sell-off and Treasuries rally. However, there was a more hawkish outlook to 2019-2020. In response to the rate hike, the People’s Bank of China increased its money market rate by 5bps saying the move is “in line with market expectations and a normal reaction the Fed’s rate hike”. With the hike out the way and markets more balanced, focus will shift to the developing global trade policies.

We remain comfortable with our current positioning especially as the market already has 3 hikes priced in for this year. Our single A rated portfolios currently yield ~4.4% and offer over 3 notches of credit protection.

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