Fed's stance praised as US stimulus end in sight

Fed's stance praised as US stimulus end in sight

The Federal Reserve has been praised as careful and cautious by industry experts after it left the Fed Funds Rate unchanged at 1.00-1.25 per cent, and announced it would begin to reverse its crisis-era stimulus programme from next month.

Speaking about the unanimous decision, which was made in line with wider market expectations, Nancy Curtin, chief investment officer at Close Brothers Asset Management, said such caution from the US central banks was understandable given the changing composition of its current leadership, a tightening labour market and weak wage growth.

“The devastation of hurricanes Harvey and Irma will no doubt cast a shadow over the third quarter’s growth figures too, which the Fed will be watching closely, but this should be a temporary effect," Ms Curtin said.

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"In the longer run, we may see government infrastructure spending in the areas most affected, a move that will provide some small fiscal stimulus.”

Antoine Lesné, EMEA head of ETF strategy at SPDR ETFs, part of State Street Global Advisors, also praised the Fed for its carefully choreographed decisions.

“As predicted and carefully telegraphed over the past month, the Fed is moving from talking to acting and will be the first central bank to start the [quantitative easing stimulus] unwinding process.

"A very careful and slow one that has already been partially priced in.” 

The Fed also announced it continues to forecast it will further hike rates in December, with all but four members seeing the FFR at 1.25-1.50 per cent or above by year-end.

However, Luke Bartholomew, investment strategist at Aberdeen Standard Investments, said it would be hard for investors to put too much faith in this forecast.

“The Fed has firmly signalled that a December rate rise is still on the table.

"But it will be hard for investors to put too much faith in this forecast while there is still plenty of time for the Fed to change its minds.

"Clearly the Fed still believes that lower unemployment will eventually translate into a pick-up in inflation. But if inflation continues to undershoot it is hard to see the Fed following through on a hike.

"At some point its faith in its models will surely be shaken. Beyond December, policy is even more uncertain as we wait to see who Trump appoints to the Fed.”

Also in the latest announcement from the FEd is the news its rate setting committee sees the longer-run FFR rate – the neutral rate – lower than in June at just 2.75 per cent from 3.00 per cent. This has implications for longer term US Treasury yields, beyond a cyclical tightening.  

David Page, senior economist for US and UK at AXA Investment Managers UK, who said: “We did not expect a further reduction in the Fed’s assessment of the longer-term rate. If this is persistent, this is something that is likely to cap the rise in longer-term yields. “