Something for the hawks and the doves

The financial media and press seem to feel that Wednesday nights Federal Reserve meeting gave something to both the hawks and the doves. The Federal Reserve did raise interest rates as expected by 25 basis points and reiterated their expectation to do so again in December. The Hawks, as Jay Powell reinforced the position the Federal Reserve has taken that they intend to continue to tighten monetary policy. The Doves, as he stuck to his cautiously positive outlook reiterating the Fed are keen not to wish to slow economic growth. Donald Trump reiterated his opposition to higher interest rates. The Federal Reserve no longer consider their current policy as accommodative, however, interest rates remain low enough to support growth.

Reactions from both equity and bond markets were muted. Rising oil prices, trade tensions and tighter monetary policy not yet spooking equity investors in the US. The equity and bond market continue to put faith in the Federal Reserve’s view that inflation and economic growth momentum will not pick up to a point that will force the Fed to tighten policy more aggressively.

Italy forced its way back into the headlines, however, not even that unduly spooked stocks in Europe on Thursday. The Euro fell as concerns developed that Italy’s budget for 2019 could be delayed due to internal political rankling’s within the Italian government.

The eagerly awaited event in the US gave the outcome anticipated. Quite what the state of Goldilocks porridge is at the moment? Monetary policy, despite the Fed’s actions generally remains accommodative, inflation has been trending modestly higher around the globe, but again central bankers remain comfortable that it is not about to spike higher. Unemployment levels have led to some wage inflation and despite the continued concerns on several fronts that could impact economic growth, the global economy is expected to grow for the next couple of years. So, in theory, the porridge remains close to the right temperature. Hence equity markets have not yet been concerned with the modest fall that has taken place in bond prices recently. As one economist put it at an economic forum we recently attended, he felt there may be a few amber flags but as, yet he did not see too many red ones.

Posted on September 27, 2018 .