Asset managers have welcomed the Federal Reserve's decision to raise US interest rates by 25 basis points (bps), though some have warned pursuing two further hikes this year may be "tricky" if President Donald Trump continues aggressively to pursue deregulation, tax cuts and more government spending.
The Fed increased interest rates by 25bps to the range of 0.75%-1% following a two-day meeting of its Federal Open Market Committee (FOMC). It also said it hopes to raise rates three times throughout 2017.
In a statement, the FOMC said it raised rates because the labour market has continued to strengthen since its February meeting, while economic activity has continued to expand at a moderate pace.
"Job gains remained solid and the unemployment rate was little changed in recent months. Household spending has continued to rise moderately while business fixed investment appears to have firmed somewhat," it said.
In a press conference following the decision, Fed chair Janet Yellen said it is "too early" to consider the potential impacts of fiscal policies proposed by US President Donald Trump, adding that they could create "great uncertainty" going forward.
The Fed's decision to hike rates follows another 25bps rate rise in December last year, and reflects the US strengthening economy in the wake of President Donald Trump's election in November last year.
The move was widely expected by markets, with futures market having priced in a 100% likelihood of a rate rise earlier this week. However, the Fed's confirmation of a three rate increase goal for 2017 in its statement led market odds of four Fed rate increases in 2017 to dip to 19%, down from 24.5% on Tuesday.
With 10-year treasury yields diving by as much as 8.9bps to 2.511% following the news, the asset management community broadly welcomed the hike, with many claiming that growth in emerging markets and Europe is also likely to support further rates going forward.
However, some pointed out that the Fed could be unable to keep up with easier fiscal policy under President Donald Trump - with headline inflation hitting a five-year high in February as a result of the new President's domestically-orientated rhetoric and infrastructure-heavy policy stances.
Bryn Jones, head of fixed income, Rathbones
The Fed's rate rise by 0.25% to 1% was a fait accompli. They have cautiously signalled a new policy phase as the economy strengthens. The Fed see two more hikes in 2017; incidentally, oft-cited Morgan Stanley see a total of six by the end of 2018, which I also believe is a possibility.
The dot plot illustrates the rate projections of the FOMC members - the median is for three hikes this year; so on track for one in June and another one in December. However, note that the number that view three hikes this year has moved up from 11 to 14, and it would only take one more member to move up their forecast and the median would shift to four hikes.
Anthony Doyle, fixed interest investment director, M&G Investments
The surge in headline inflation to a five-year high of 2.7% in February is a concern for the Fed, who will be keen to ensure that inflation expectations remain well-anchored. With Chair Yellen stating in a recent speech that "the process of scaling back accommodation likely will not be as slow as it was during the past couple of years", we anticipate at least two more rate hikes, with a good chance of three by the end of the year dependent upon the extent of fiscal stimulus that is announced by the US government.
In addition to the underlying strength of the US economy, the global economic backdrop remains supportive. Both China and Europe are growing nicely, suggesting that global growth is set to accelerate in 2017 after slowing to 3.0% in 2016. We expect global corporate default rates to remain low and therefore a favourable environment for risk assets like investment grade and high yield corporate bonds.
Nancy Curtin, chief investment officer, Close Brothers Asset Management
Last week's upbeat US jobs report was the green light the Fed needed for its eagerly anticipated rate rise. With the economy approaching full employment and indicators looking more robust, the Fed felt confident continuing on the path to normalisation. At current activity levels, the economy should be well able to tolerate moderately higher interest rates.
The rosy economic outlook extends beyond the US, whose economy has benefited especially from the 'Trump bump' in confidence. Emerging markets have recovered well lately and global growth is looking positive. There's even talk of a further rate rise or even two over the coming year, although the Fed will be keeping a close eye on improvements to economic data before taking any new decisions to raise. However, let's be clear - this is not the start of ‘tight' monetary policy.
Russ Mould, investment director, AJ Bell
The quarter point increase in US interest rates was widely anticipated and hence priced in by markets. Although history shows that a third rate hike in a cycle can lead to a stock market stumble, ultimately the US stock market has forged higher providing the US economy and corporate earning remain strong.
In fact, analysis of the eight peaks in the S&P 500 since 1971 suggest that the US interest rate needs to increase by 1.84% - or between seven and eight one-quarter point rate rises - before the market reaches its peak in the cycle.
Luke Bartholomew, investment manager, Aberdeen Asset Management
The Fed might finally be hitting its stride. The question now is how quickly the next few hikes come. The Fed has today confirmed that it is leaning towards three hikes this year. This is roughly what investors were expecting so financial markets should take today in their stride.
But the Fed faces a tricky path from here. Over the last few years they have consistently overestimated how many hikes they will deliver because the economy has turned out weaker than they expected. But now the risk is that the Fed will need to catch up with easier fiscal policy and stronger growth outlook. Meanwhile, they are facing increasingly shrill calls for their independence to be curtailed. It is hard to imagine that the rest of this hiking cycle will go off without a hitch.
Nicholas Wall, portfolio manager, Old Mutual Global Strategic Bond fund
Since the election of Trump, financial conditions have eased considerably, due to the former reality TV star's pledges to splurge on infrastructure and cut financial regulations. By some estimates, this has had the same impact as a 0.75% cut to US interest rates.
We are not surprised the Fed tightened policy today and we expect more rate hikes later this year. Markets estimate about two hikes this year; as the Fed, mindful of its past errors, will probably seek to lean against the looser financial conditions, this appears too low in our view.
Kully Samra, UK managing director, Charles Schwab
The decision is a defining moment in US monetary policy heralding the end of the "lower for longer" era. We expect the Fed to continue on this rate-raising path for the foreseeable future and Janet Yellen's intention to increase rates three times this year demonstrates a bullish confidence in the strength of the US economy.
We expect three rate hikes this year, including today's, and a further two in 2018. There are, however, a lot of unknowns that could change our longer-term view. For instance, if White House plans for deregulation, tax cuts and more government spending are realised, then growth and inflation could be stronger than expected and lead to more hikes. On the other hand, potential border taxes, trade tariffs and tighter monetary policy could slow growth and inflation.
Thanos Bardas, head of interest rates, Neuberger Berman
Today's move by the FOMC to hike the federal funds rate by 25 basis points makes good on recent comments from Janet Yellen and her colleagues the next policy move would come sooner rather than later.
Only a few weeks ago, Fed funds futures reflected about a 25% chance of an increase in March. By this past Monday, this figure had surged to more than 90%, making the actual event a virtual afterthought.
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