Market rate cut expectations are not justified
02 May 2019
As was widely anticipated, the FOMC left the funds rate target range unchanged but unexpectedly made a technical reduction in the IOER rate of -5bps just to keep the effective funds rates, EFFR, in the middle of the 2.25-2.5% target range and to avoid breaching the upper limit of the target range.
The FED upgraded its assessment of both growth and labor markets as the economic activity has risen at a “solid rate" recently. Downside risks to the outlook have diminished.
Turning to inflation, FOMC members believe that the recent inflation softness is likely to be transitory. Factors responsible for the inflation softness should likely subside later this year, suggesting that current market expectations for a rate cut are unjustified.
On the balance sheet reinvestment policy, the FOMC statement gave no guidance, suggesting that all the details will be forthcoming in May.
Even if the tone sounds a little bit more “hawkish’, Chair J Powell emphasized that the current policy remains appropriate and as there is no sign of overheating in the economy, the FOMC members see no reason to change in either direction. The “patient” stance remains justified.
This commentary is intended for professional investors within the meaning of MiFID II. It is provided for informational and educational purposes only and is not intended to serve as a forecast, research product or investment advice and should not be construed as such. It may not constitute investment advice or an offer, invitation or recommendation to invest in particular investments or to adopt any investment strategy. Past performance is not indicative of future performance. The opinions expressed by La Française Group are based on current market conditions and are subject to change without notice. These opinions may differ from those of other investment professionals. Published by La Française AM Finance Services, head office located at 128 boulevard Raspail, 75006 Paris, France, a company regulated by the Autorité de Contrôle Prudentiel as an investment services provider, no. 18673 X, a subsidiary of La Française. La Française Asset Management was approved by the AMF under no. GP97076 on 1 July 1997.