Following FED’s last meeting and FOMC’s announcement that they do not expect to be rising interest rates until 2023, investors have been carefully focusing their attention on this meeting. These are some of the principal Asset Managers comments on this:
Anna Stupnytska, Global Economist at Fidelity International
This month’s Fed meeting has been closely followed by analysts amid the significant rise in bond yields. In line with his latest comments, yesterday’s institutional statement does not suggest that those responsible are particularly concerned about this dynamic.
The combination of extremely easy financial conditions, the acceleration of the vaccination campaign, the latest fiscal package launched recently and the prospects of reopening on the horizon are driving the Fed’s tolerance for this increase in yields.
Although the inflation and growth forecasts have been revised upwards on the medium-term horizon, the median has remained unchanged, suggesting that there will be no increases until 2023. This sends a message of moderation and reveals that the Fed is taking seriously your new Flexible Average Inflation Target (FAIT).
Sebastien Galy, Head of Macroeconomic Strategy at Nordea AM
Federal Reserve maintains dovish stance
The Federal Reserve insists on actual improvements rather than forecasts as it used to before tapering its bond purchases or hiking interest rates. Hence, it is willing to run behind the curve and risk the inflationary effect of an unemployment rate forecast at 3.5% in 2023. The first hint of a tapering of bond purchases is therefore likely at the end of this year when the unemployment rate should be substantially lower and inflation around target, while the first rate hike is likely set for 2024. To control for what will likely be bubbles in real estate, the Fed will likely resort to charges on bank capital to discourage excessive lending, referred to as counter-cyclical buffers.
Faced with a Fed running behind the curve, the yield curve is steepening in anticipation of the eventual catch-up of a Fed faced with inflation in 2024 and high debt issuance. Fears also that the Fed is simply inflating away the debt are likely an additional factor. We focus on the 1.80% for the 10 year yield first and then 2% in the second half of the year. This continues to create a rich opportunity set for absolute return strategies or low duration solutions.
Paul O’Connor, Head of the Multi-Asset at Janus Henderson
This FOMC had the potential to be defining moment for the Fed’s approach to monetary policy and a major market event, but it didn’t turn out that way.
The Fed introduced a new monetary policy framework last year, promising to “aim to achieve inflation moderately above 2% for some time”. This meeting could have been the first real test of that framework, when the Fed would reveal what sort of inflation overshoot it was really prepared to deliver. However, the Fed’s economic projections were just not extreme enough to give investors the opportunity to learn how to calibrate the central bank’s new reaction function.
As widely expected, the Fed’s new growth forecasts were a major uplift to December’s stale predictions, reflecting recent improvements in US macro momentum, the new administration’s fiscal stimulus and vaccine-boosted reopening trends. Real GDP forecasts of 6.5%, 3.3% and 2.2% for 2021, 2022 and 2023 and Core PCE forecasts of at 2.2%, 2.0% and 2.1% were typically quite close to consensus expectations.
What was most interesting here was that, despite these forecasts and the Fed’s projected decline in the unemployment rate from over 6% today to 3.5% in 2023, the consensus view from Fed governors is that they expect to keep interest rates on hold throughout 2023. While bond markets can take comfort from the Fed delivering on its promise to go slowly with rate hikes, despite inflation creeping above the 2% target, the monetary tide is nevertheless turning. Whereas, back in December, only five of 18 Fed officials predicted higher rates in 2023, seven now expect a rate hike in that year and a third of the committee expects that more than one will be needed. Four participants now project hikes for 2022, compared to just one in December.
The Fed delivered a fairly dovish message to the markets today, but the big debates have been deferred not decided. While it is not hard for the Fed to remain patient, while projecting inflation bouncing around target over the forecast horizon, the pressure to tighten policy is likely to intensify if the US recovery accelerates into the summer, as everyone expects. Many of the questions that have been avoided today will linger over the months ahead and may well have become more urgent by the June FOMC. By then, the Fed might be prepared to take the first decisive step away from the current super-accommodative monetary stance by indicating when it will start to taper QE. If macro momentum continues to build, it might also be confirming market expectations of rate hikes in 2023 at that meeting. The June FOMC could be a more challenging meeting for Chairman Powell than today’s turned out to be.
Bill Papadakis, Macro Strategist at Lombard Odier
The main conclusion of the FOMC meeting is that while policymakers have expressed a more promising economic outlook, they largely hope to keep the official interest rate unchanged for a long time.
The Fed’s projections show higher growth, lower unemployment and higher inflation compared to the set of projections from last December. And yet the midpoint “point” suggests that policymakers expect an unchanged Fed interest rate at its near zero level throughout the forecast horizon to 2023.
Most importantly, this is the case even though inflation is expected to be above target. This is a clear manifestation of the Fed’s new flexible average inflation targeting framework, suggesting that the bar for rate hikes is now higher than in previous cycles and that “excesses” will be tolerated to offset earlier periods. inflation below target.
Therefore, we consider the outcome of yesterday’s meeting to be reassuring for risk asset markets, as the Fed does not appear to share money markets expectations of an upcoming policy tightening. But the Fed hasn’t answered all the critical questions for the markets. The outlook improvements were significant, but not exaggerated. And while marginal inflation “excesses” can be tolerated, we do not know how far the Fed’s tolerance will go. Finally, it should be noted that, while most participants expect an unchanged interest rate until 2024, the number of those expecting an earlier rate hike is increasing (four by 2022, seven by 2023).
In other words, this is not the end of the game. Our baseline hypothesis remains that a strong recovery will eventually push the Fed to make its first interest rate hike in late 2023.
Gero Jung, Chief Economist at Mirabaud Asset Management
The Federal Reserve confirmed that its ultra-accommodative monetary stance will continue, signalling no policy rate hikes until at least the end of 2023. Two main points were particularly scrutinized at the March meeting. First, ‘tapering’ asset purchases is not on the agenda. As market interest rates continued to rise since the beginning of the year, one main question for investors focused on whether the FED—similar to the ECB last week—would push back against higher yields. With the US Central bank continuing to buy $80 billion in Treasury securities and $40bn mortgage-related securities every month, “tapering” those purchases is a dominant market theme. The Fed’s reply is clear on that— lower asset purchases is not on the agenda. In particular, Fed’s Powell was emphasizing that “substantial further progress” will be needed, adding that “actual, not forecasted progress” is what the Fed is looking at. Also, the Fed will provide “as much advance notice of any potential taper as possible”, while confirming that the expected rise in inflation will be transitory—hence with no implication for monetary policy.
Market reaction: Given the dovishness of the Fed’s statement—namely by keeping policy rates near zero— financial markets reacted with a risk-on tone. Soothing market sentiment that rates will not change in the next two years and more, equities gained. In fixed income, the benchmark ten-year Treasury yield stayed above 1.60%.
Asset allocation: We continue to be prudent on US fixed income securities, both for sovereign and corporate debt—keeping our underweight positioning. We confirm our recent rebalancing inside the US equities pocket, by switching investments from US small/ mid-caps to the broader S&P 500. We also confirm our neutral stance on the US dollar.