Daily Management Review

June Rate Hike Coming Your Way, Fed To The Market


05/04/2017




June Rate Hike Coming Your Way, Fed To The Market
The U.S. Fed signaled it is still moving ahead with policy tightening and gave a nod to a temporary weakness in the economy as expected.
 
"They're looking past the first-quarter weakness. They are laying the groundwork for a June rate hike, in my opinion," said Peter Boockvar, chief market analyst at Lindsey Group.
 
According to Michael Schumacher, head of rates strategy at Wells Fargo Securities, up about 5 percentage points after the announcement, Fed funds futures indicated just about a 75 percent chance of a June interest-rate hike.
 
"It seems pretty optimistic. ... There's no big difference between this statement and the last one. The comment that they are ignoring weak first-quarter growth is the big thing. There's nothing really changed in their path," Schumacher said.
 
Economists expect a bounce back and some see growth over 3 percent after first quarter growth grew at a weak 0.7 percent. The softness was acknowledged by Fed in its statement.
 
"The Committee views the slowing in growth during the first quarter as likely to be transitory and continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term," they wrote.
 
The Fed expects inflation to stabilize and noted that it edged lower in March.
 
"While many have suggested that recent data softness, such as the 0.7 percent initial print on first quarter GDP could slow down the Fed's actions, we think that the Committee will be unwavering in its path toward at least two more hikes this year, and today's statement reflects that contention," wrote Rick Rieder, BlackRock's chief investment officer and co-head of global fixed income.
 
In articulating its intentions, the Fed has been clear, Rieder said. "In our view, only a significant and sustained deterioration in the economic data, or a financial market shock due to an unexpected political event, is likely to force the central bank from that route," he said.
 
Officials were expected to have discussed changes to the Fed's balance sheet at length during the two-day meeting, but the statement did not mention it. But expected to be released May 24, that discussion should be revealed in the minutes of the meeting.
 
It was maintaining its strategy of balance sheet reinvestment, meaning it replaces securities as they roll down, the Fed noted in its statement instead. Many strategists expect it to tackle its balance sheet after those moves as the The Fed has forecast two more rate hikes this year.
 
Shrinking of its balance sheet could begin as early as this year, the Fed has said.
 
The Fed "will also be very deliberate in reducing the amount of securities held on its balance sheet from roughly $4.3 trillion to ultimately something closer to $2.75 trillion [over a long period of time]," Rieder added.

By ending its policy of reinvesting in Treasurys and mortgage securities when they reach maturity, the Fed could reduce its balance sheet.
 
(Source:www.cnbc.com) 






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