The Fed is playing a strong hand as it keeps normalising rates

Franck Dixmier | 07/06/2018
Franck Dixmier

Summary

Clear forward guidance from the Fed and a run of strong economic data point to one probable outcome from the FOMC’s June meeting: a rate hike of 0.25%. We don’t believe that any external factors – such as emerging-market volatility or political tensions in Italy – are likely to deter the Fed at this stage.

Key takeaways

  • The Fed has clearly telegraphed its next move: investors should expect a 25-basis-point rate hike in June
  • Key factors pushing the Fed towards another rate increase: rising inflation, low unemployment and an upward trend in wages
  • We expect a grand total of four rate increases in 2018, with two more on the horizon in 2019

The next Federal Open Market Committee (FOMC) meeting is not expected to deliver many surprises, given that the US Federal Reserve has already clearly telegraphed its next move. We expect to see a 25-basis-point rate hike in June, which would move the federal funds target rate to 1.75%-2%.

Recent economic indicators have confirmed a rising inflation trend in the US, which should help inflation settle solidly above the Fed’s 2% price-stability target. However, the markets are unlikely to be concerned about this, since it is another area where the Fed’s intentions have been quite clear: the forward guidance from the FOMC’s last meeting explicitly stated that the Fed was adopting a symmetrical inflation target of around 2%.

With the core personal consumption expenditures (PCE) price index showing a year-on-year increase of 1.6% in April, we are expecting PCE to rapidly breach 2% and remain squarely above this level. The US economy has also shown notable strength, marked by an 18-year low in the unemployment rate (3.8%) and an upward trend in wages. The combination of these factors gives the Fed a strong hand to play as it justifies the continued normalisation of its monetary policy.

Some investors have shown a tendency to reduce their expectations for rate hikes based on external issues, including tensions in emerging markets and resurgent political risks of the kind most recently seen in Italy. However, we believe it would be premature for the Fed to take these factors into account at this stage.

After the Fed’s anticipated June rate hike, we are expecting two more increases this year – for a grand total of four in 2018. We also expect to see two more rate hikes in 2019.





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Franck Dixmier

Global Head of Fixed Income, CIO Fixed Income Europe
Franck Dixmier is Global Head of Fixed Income and Chief Investment Officer (CIO) Fixed Income Europe, and a member of the Global Executive Committee at Allianz Global Investors.

Prudence is on the agenda at the ECB’s next meeting

Franck Dixmier | 11/06/2018
ECB

Summary

Given the growing number of risks facing the EU – including slowing growth, rising US protectionism and upheaval in Italy – we expect caution from the ECB. Not only is it unlikely the central bank will detail the exit strategy for its extremely accommodative monetary policy, but QE may even be extended.


Key takeaways

  • Against a backdrop of weak growth and an unreliable rebound in inflation, the ECB is facing two key risks to its economic forecasts: US protectionism and Italian politics
  • Look for the ECB to express caution after its June meeting, but don’t expect any comments about the political situation in Italy at this stage
  • Our core scenario calls for the ECB’s QE program to be extended, with tapering continuing until December 2018
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