Another Fed hike, but how many more to come?
Following the latest interest rate rise in the US, we expect a further one in September and balance sheet reduction to kick in around the turn of the year.
15 June 2017
The Federal Reserve (Fed) has raised rates by another 25 basis points (bps) and set out its plans for trimming the $4.5 trillion assets acquired during its asset purchases programme.
Forecasts, known as the “dots”, from members of the Federal Open Market Committee (FOMC) suggest another rate rise this year and two more hikes in 2018.
Fed chair Janet Yellen said that balance sheet reduction could start “relatively soon” if the economy behaves as expected. Once started, the Fed expects to sell $10 billion per month of Treasuries and mortgage backed securities, rising to $50 billion per month after 15 months.
We still expect another 25 bps hike in September and another two hikes in 2018 with a significant pause around the turn of the year as balance sheet reduction starts. Such a projection is not far from the “dots”; however, we will need to see evidence of a pickup in growth and inflation for this to be realised.
Inflation figures in the US continue to come in below expectations with the core rate falling to 1.7% last month. The recovery in growth since the middle of last year has not been accompanied by an increase in pricing power, while on the cost side, wage growth remains sluggish.
The Fed will be aware that broader monetary conditions which take into account the value of the dollar, bond yields and the equity market have loosened.
We also expect to see a bounce in growth in the current quarter which should be sufficient for the Fed to move in September. Thereafter though, the outlook will depend on whether the normal cyclical forces of a tight labour market are sufficient to offset the structural headwinds which are weighing on inflation.
Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.