Yesterday’s Federal Open Market Committee (FOMC) meeting saw participants vote overwhelmingly to keep rates on hold for now. Still, according to GAM’s chief economist Larry Hatheway, the Fed’s statement has reinforced the view that a rate hike before the year end is a real possibility.
“The statement noted that spending and investment have been increasing at solid rates, an upgrade from ‘moderately’ from the September meeting,” he said, adding that the Fed also dropped concerns about foreign developments and upgraded its outlook.
Patrick Schotanus, investment strategist at Kames Capital, found the hawkish tone of the accompanying statement surprising.
“The shift in language included a more upbeat assessment of spending and investment and the removal of the previous reference to the potential risks of global and economic developments,” he said.
“It also changed the wording of its forward guidance. The market’s reaction has been most clearly reflected in the implied probability of a rate rise at the next (December) meeting: it increased from roughly 35% to 48% this morning.”
According to James Barrineau, co-head of emerging market debt at Schroders, a moderately more hawkish Fed will perhaps stall a recovery in emerging market currencies.
“But the global search for yield will likely keep dollar denominated emerging market debt from retreating in price substantially,” he said.
Barrineau added that it is difficult to argue that a modest Fed rate hiking cycle has not been well anticipated in this asset class.
“So while a first Fed rate hike being more fully priced in for December may temporarily cause a return of market jitters, we believe the small likelihood of an extended hiking cycle and substantial global liquidity from other developed central banks lower the odds for a relapse into systemic emerging market concerns,” he concluded.
