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May 3 2018

State Street Comments on Federal Open Market Committee Meeting

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In reaction to today’s US Federal Open Market Committee (FOMC) meeting, Lee Ferridge, head of Multi-Asset Strategy, Americas at State Street Global Markets, Sophia Ferguson, senior portfolio manager for active fixed income and currency at State Street Global Advisors and Antoine Lesné, head of EMEA strategy and research for SPDR ETFs, offer their views.

Ferridge commented, “As widely expected, the FOMC meeting proved to be a non-event, with statements left largely unchanged. A move at the next meeting in June is now 90 percent priced into the market. While there was some speculation that the Federal Reserve (Fed) would use this meeting to deliver a more hawkish message, thereby paving the way for an extra “dot” for 2018, we did not see this as a realistic prospect. A slightly disappointing growth reaction thus far to the late 2017 tax cuts, no sign of a meaningful pick-up in inflation pressures and uncertainty generated by the potential for a trade war were always likely to commit the Fed to a steady as she goes message. There might also be a little concern over recent market moves, with stocks flat so far in 2018 while US Treasury yields have moved meaningfully higher, doing some of the Fed’s tightening work for it.”

Ferguson commented, “As widely expected, today’s meeting offered a neutral tone regarding the policy path and the economic outlook. With core inflation turning a corner, the Fed regained confidence that the coexistence of record-low unemployment and below target inflation will not persist. Geopolitical concerns, particularly over trade, have increased economic uncertainty at the margins, but the measures to be taken by the US and its trading partners are not yet definitive enough to warrant a material change to the outlook. Further patience is required before the Fed publically commits to any adjustments in the expected policy path for 2018, leaving markets to trade at the mercy of speculative headlines and animal spirits for another day.”

Lesné commented, “As expected, the FOMC left rates unchanged, leading to a potential move at the next meeting in June. While core Personal Consumption Expenditures (PCE) reached 2.5 percent on base effects, the softer global economic data across developed markets and the impact of geopolitical concerns cast some shadows. Nevertheless, hourly earnings will potentially continue to lead the market to test three percent yield on the 10-year treasury and raise the odds of four hikes in 2018.While this meeting was not the occasion to comment on this possibility, the risk of an inverted yield curve could go up. Ultimately the long end starts to be attractive for investors.”

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