“Our base case remains that the Fed will lift rates again this year, but by less than the four hikes signalled in their most recent “dot plot,”” said Ian Kernohan, economist at Royal London Asset Management. With the March meeting still some way off, the Fed wanted to keep its options open, according to Kernohan. “However, there are signs in the January statement that suggest a dovish tint to their thinking, in particular the reference to global economic and financial developments implies it is not just about payrolls,” he added.
Peter Cameron, associate fund manager at EdenTree Investment Management, agrees. “As expected, the Fed last night added some dovish tweaks to its commentary that indicate the four-hike trajectory it laid out last year may no longer be on the cards. Much of the economic data this month has softened and bearish sentiment has begun to grip markets.”
Cameron continued: “Near-term inflationary pressures look set to remain subdued, despite the ongoing strengthening of the US labour market. Therefore barring any sudden turnaround in the current outlook, a two-step rates strategy now looks more likely for 2016 with the next hike perhaps not materialising until the summer.”
Richard de Meo, managing director of Foenix Partners, noted Fed members seem unwilling to let global growth concerns or market turmoil derail the plan it took them so long to implement. “With no scheduled update to the dot forecasts, the committee was free to acknowledge increased global uncertainty without having to specifically evidence its impact on carefully laid plans,” said de Meo.
And, he added, the cautious tone, with just minor linguistic adjustments to scrutinise, saw fixed income markets re-price to reduce chances of a March move and shift expectations for this year’s first full rate hike to July. “In summary, it was an unexciting win for Janet Yellen and the Fed who will be delighted to have kept their options open without revealing any cards,” concluded de Meo.
