US Fed likely to hold fire despite hawkish intent

At last night’s meeting, the US Federal Reserve (Fed) kept interest rates on hold. It also announced that it would begin to normalise its balance sheet, starting to reduce its asset holdings from October. It will initially cut up to $10 billion each month from the amount it reinvests.

Aims for further rate hikes

The Fed announcement was seen as being more hawkish than expected with a signal that it is still considering another interest rate rise in December.

This remains a possibility as the Fed still wishes to normalise interest rates further. For that to happen, we will need to see evidence that inflation is picking up and growth remains healthy.

We expect next move in 2018

Our view remains that the Fed will wait longer so as to gain reassurance on inflation coming back to target, and will delay the next move until later in 2018.

On a more dovish note, the Fed lowered its long-term view of rates to 2.75%. This is significant for long rates and reinforces the view that real rates will be close to zero in the “new normal” environment.