Kevin O’Nolan, multi-asset portfolio manager at Fidelity International agreed the hawkish tone was in line with Yellen’s statement last month. He said given the strongest economic backdrop since possibly the financial crisis – certainly since 2011/12 – should lead to a core position of tightening and was not at all surprised.
He said the key challenge for Yellen was in the nuances around the communication of her intentions.
“When we look at all the forward guidance in terms of trying to communicate that in an effective manner you can see how they will be more cautious and reluctant to be seen to pre-commit given how that has worked out in the last few years. That is also compounded by not really knowing what the Trump presidency brings.”
It certainly appears as though the indications of the Federal Reserve and the expectations of the market are becoming far more aligned.
“I’m not suggesting that we might see four rate rises this year but three looks about right, especially if you see a hawkish path into 2018,” O’Nolan said.
Nikolaj Schmidt, chief international economist at T. Rowe Price, is also still expecting three rate rises this year, but not until May or June.
“Trump’s election has raised the prospect of additional fiscal stimulus, which would ordinarily exert greater pressure on the Fed to hike rates. Further hikes would not help Trump to fulfil his objective of creating jobs in the ‘Rust Belt’, however, and he may seek to use his appointments to the FOMC to persuade the Fed to adopt a more accommodative stance.
“My guess is that the current voting members on the FOMC are aware that they may come under pressure to be overly accommodative, and this may partly explain why they adopted a more hawkish stance in December,” he said.
Confident there will be a US recession “at some point”, Potter is urging the Fed to act now, rather than risk falling behind the curve.
“All the evidence, in terms of data, is reasonably supportive of [a rate increase] now, again in summer and then again in the autumn. I think three quarter point moves that are consistent with the data and compounded with Trump’s policies to be entirely logical.”