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Fed rate hike talk causes uncertainty for bond leaders

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The Federal Reserve’s projected number of rate hikes for 2017 is “puzzling” according to Pimco’s global strategic adviser.

At yesterday’s meeting, the Fed raised rates by 25 basis points to a range of 0.5 per cent to 0.75 per cent with a unanimous vote, as anticipated by the market. At the same time the FOMC took a slightly more hawkish stance as four of the 12 members increased their projection for the number of hikes in 2017 from two to three.

Pimco global strategic adviser Richard Clarida says: “Four members of the FOMC appeared willing to place at least a modest bet that Trumponomics will justify three hikes instead of two in 2017.

“For a Fed that is always reminding us that it is “data dependent,” this is at least a bit puzzling, as the Fed projections for GDP growth in 2017 were marked up by only 0.1 percentage point, from 2 per cent to 2.1 per cent, and the inflation forecast, at 1.9 per cent, was not revised at all. Go figure.”

However, AXA Investment Managers senior economist David Page, says he thinks there will be two rate rises next year, which is “softer than the Fed currently suggests”.

“We are wary that the tightening of financial conditions as markets anticipate the administration’s actions is likely to restrain the Fed’s hand as we have seen so much over the past 18 months. However, we too acknowledge the “cloud of uncertainty” that is only likely to begin to dissipate after inauguration next year.”

Page adds that while the rate rise was “anti-climatic”, the markets reacted, with two-year and 10-year government yields rising by 8 basis points and 7 basis points to 1.24 per cent and 2.52 per cent respectively. The S&P 500 dropped 0.5 per cent while the dollar climbed with the DYX index up 0.8 per cent.

Heartwood Investment Management investment director David Absolon says the rate rise is “no game changer”, adding: “The market reaction in the next few days is not irrelevant, but it will be in January we see whether the market has over-tightened financial conditions.’’

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