Dovish rate rise from the Fed while BoE and BoJ stand pat
Global central bank roundup: while the Federal Reserve moves towards normalisation of interest rates, it appears to remain a remote prospect for Japan and the UK.
16 March 2017
The US Federal Reserve (Fed) took another step towards the normalisation of interest rates by raising its target range for the federal funds rate by 25 basis points to 0.75% to 1%.
This was only the third rate hike since December 2015, but the move had been fully anticipated by markets following strong signals from the central bank in recent weeks. Bond and equity markets have rallied following the announcement as there had been expectations of a more hawkish tone from the Fed, but Chair Janet Yellen maintained her reputation as a dove in the post-meeting press conference.
Despite consumer price inflation hitting 2.7%, there was no hint of a desire to accelerate rate hikes with the famous “dot plot” of Federal Open Market Committee members’ rate expectations unchanged for 2017 and 2018. The Fed indicated it is happy to see headline inflation run above 2% for a period. Although there is now more consensus on the rate committee that the Fed will deliver three hikes for 2017, there was no step-up in the pace of anticipated tightening.
The Fed is likely to have been pleased at the market reaction as in the past market volatility has constrained its ability to act. This time, with equity and credit markets rising while bond yields and the dollar fell, it could be argued that overall monetary conditions in the US have not tightened and may have even loosened with the Fed rate rise.
Elsewhere, policy normalisation looks more remote in the UK and Japan. Both the Bank of Japan and Bank of England will have been closely watching the Fed for both what its action tells us about the world’s largest economy and for any spillover into currency markets. Today, both left monetary policy unchanged.
The Japanese economy is performing better, but unlike in the US, inflation is still some way from its 2% target. For the UK, high and rising inflation is expected to cool consumer spending while fears over the impact of Brexit uncertainty on capital expenditure are expected to slow demand, hence the need to keep policy loose.
Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.