Further hikes expected
Asset managers had expected the hike as it was well flagged in advance and as Royal London economist Ian Kernohan said, the market was interested mainly in any change of tone in Fed language and the Summary of Economic Projections.
“With the scale, mix and timing of any fiscal stimulus still very unclear, the Fed is right to be cautious with the pace of tightening, despite some robust economic data in recent weeks,” he added. “We expect more rate hikes this year, which should be supportive of the dollar, given other major central banks are unlikely to tighten policy for some time.”
Axa Investment Managers senior economist David Page said the firm is sticking to its forecast for two further hikes this year and four in 2018.
“We suggest that momentum in the economy is likely to prove sufficient to see the Fed tighten policy again in June, although we do note the risk of another seasonal wild card in the Q1 GDP data,” he said.
“We also note that we expect the Fed to have to raise its growth – and rate – forecasts further if the new administration passes new tax laws that lead to some short-term stimulus. However, we would only expect that to impact forecasts later in the year.”
But Old Mutual Global Strategic Bond Fund portfolio manager Nicholas Wall said market estimates of further rate increases this year look too low.
He said: “The US Federal Reserve has just raised interest rates for the third time in a decade, in a significant acceleration of the pace by which it is tightening monetary policy. We believe further rate hikes are on the way – and at a faster clip than the market expects.”
Wall said a rate rise was not a surprise given the easing of financial conditions in the US since the election of Donald Trump in November and taking into account the US president’s pledges to increase infrastructure spend and cut financial regulations.
“Markets estimate about two hikes this year; as the Fed, mindful of its past errors, will probably seek to lean against the looser financial conditions, this appears too low in our view,” he added.
