investment viewpoints

The great unwinding by the Fed begins

The great unwinding by the Fed begins

In a widely expected move, the Federal Reserve kept interest rates unchanged and announced a timeline to put its stimulus programme into reverse from next month and reduce its $4.5 trillion balance sheet.

We did see some hawkish activity consistent with our view ahead of the meeting, as the December 2017 interest rate hike was kept on the table as projections for rates this year, via the dot plot, remained unchanged and contrary to market pricing.  This has caused the USD to rally and is a strong indication the Federal Reserve wants to renormalise monetary policy and look beyond low inflation. 

We continue to believe that a December rate hike is very likely but the gap between market pricing for 2018 / 2019 and FOMC expectations would need to narrow further, which creates upside risk to Treasury yields.

The much awaited balance sheet normalisation has begun and we are comforted that the Federal Reserve has so far been successful in minimising any major disruption to bond markets, unlike in 2013.  We will be monitoring bond market liquidity very closely over coming weeks. 

important information.

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