Views and Ideas

Fed increased its policy rate and continues to reduce its balance sheet

21 December 2017

As mentioned in our last macro news, last week was very busy with many central banks’ committees.

Last week there was a Fed conference: last show for Janet Yellen before handing over the power to Jerome Powell.

  • As expected, they increased the policy rate by +0.25% and decided to continue their policy of balance sheet reduction;
  • Strong 2018 GDP upward revision from +2.1% to +2.5%. Unemployment rate has been revised downwards by -0.2% to reach 3.9% for 2018 and 2019. The statement is more optimistic on US labor market;
  • Dot plot (Fed’s hikes anticipations) is unchanged.

Fed acknowledges the US economy’s good health without being worried at all about a possible overheating. Overall, markets do not move much.

Last Thursday, we had Mario Draghi’s conference following ECB’s board meeting:

  • They revised upward their 2018 GDP forecast from +1.8% to +2.3%. The speech tone regarding Eurozone activity was very upbeat. This is rightly pointed, since we have a composite PMI at 58!
  • Upward revision as well of 2018 headline inflation forecast from +1.2% to 1.4%, but this is not a real surprise. However, we had ECB’s first 2020 inflation projection at +1.7%. This is a disappointment, as we do not reach yet central bank’s inflation target … in 3 years!

ECB was clearly not hawkish. Euro bond yields are falling, driven by lower real yields. German bonds valuations are back to March levels. For instance, when an investor buys German 2026 inflation indexed, he/she is guaranteed to lose more than 10% of purchasing power at maturity. From our point of view, this valuation does not fit with Eurozone economy which is in a very good shape.

At last, a quick word on Sweden. The currency is undervalued, inflation reaches central bank’s target and growth is excellent… we expect less accommodation from Riksbank soon.

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