State Street Comments on Federal Open Market Committee Meeting

In reaction to today’s US Federal Open Market Committee (FOMC) meeting, Lee Ferridge, head of multi-asset strategy, the Americas at State Street Global Markets; and Antoine Lesné, head of EMEA strategy and research for SPDR ETFs, offer their views.

Ferridge commented, “As widely expected (the market was pricing a less than one percent probability of a move) the FOMC decided to leave rates on hold at its March meeting. Of more interest was the Fed’s future guidance via the “dot” plot, in which it removed both hikes previously expected for 2019. The Fed’s concerns over the future inflation path are clearly stronger than anticipated and it seems that the hiking cycle really is now over. This is likely to add further fuel to an equity market that has already enjoyed a strong start to 2019.

“While we expect the dollar to suffer, the EM carry trade – a favourite in the FX market in 2019 – is now likely to receive a further boost. A steepening of the 2s10s curve is also likely. In addition, the Fed confirmed that its balance sheet reduction program (QT) is likely to end sometime in the second half of the year, another positive for the risk rally.”

Lesné commented, “As widely expected the Fed did not change its main rates. The eagerly awaited outcome from the meeting was on the potential revision to the “dot” plots or rates expectations by the members of the FOMC. The downward revision to no rate hike this year meets the markets, which had been more dovish and were pricing no hikes. The 2020 is looking more aggressive too.

“Another key element was the guidance on the reduction of the Fed’s balance sheet and potential end of the normalisation process. Based on today’s decision, it is expected to happen sooner than originally expected. After the U-turn operated in January, today’s meeting provided further support to ease global financial conditions. While this could weaken the US dollar slightly, a bull steepening in the short end could provide some support to equity markets. Is this the spark that would have been needed to rally much stronger? Yes for emerging market debt in local currency.”