Schroders Quickview: Fed begins shift to less dovish stance
January’s FOMC statement struck a balanced tone which we expect to become gradually less dovish through 2015.
The Federal Open Markets Committee (FOMC) has issued its January statement, which remains mostly balanced and reflects an awareness of “international developments”, falling near-term inflation and domestic growth that has improved from a “moderate” to a “solid” pace. The Committee also commented that it views the impact of falling energy prices as boosting “household spending power”, and that it expects inflation to rise towards its goal of 2% in the medium-term.
"A June 2015 hike is still on the table."
The Treasury market has initially interpreted this statement as being more dovish and suggestive of the Federal Reserve (Fed) keeping rates near zero for an extended period. The 10-year Treasury yield has rallied 10bps to 1.72%, and the first rate hike is now being priced into the Federal Funds market for December 2015. In December 2014, the market expected the first rate hike to be in June 2015.
Our view is that the statements will become gradually less dovish as we progress throughout the year. Although officials are signaling that they will be “patient in beginning to normalise the stance of monetary policy”, a June 2015 hike is still on the table. We believe that the Fed is aware of the risks to financial stability that keeping policy too accommodative represents, especially in the face of an unemployment rate of 5.6% and core inflation of 1.4%. We believe that today’s removal of the “considerable time” phrasing is evidence of this gradual shift in stance.