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Fed split revelation threatens US equities

The minutes from the March meeting of the Federal Open Market Committee revealed that there was considerable debate over whether rates should be raised in June.

According to the minutes, ‘several participants’ were in favour of starting ‘normalisation’ in June due to the strong economic data which has been flowing over recent months.

While they were too few in number to hold sway, the development has been widely regarded as a signal the rise is closer than prevailing consensus expectations.

Softer US jobs numbers which came out after the meeting may have redressed the balance to some degree, but US companies which export could still see some downward pressure on their share price as the market digests the news.

“We are expecting the Dow Jones to open 50 points lower, at 17,850, on the back of the Federal Reserve minutes which revealed the US central bank is very much divided over when it will increase interest rates,” said IG markets analyst David Madden. “The division among Fed members alone is enough to spook the markets into thinking an interest rate hike could happen sooner than anticipated.”

Bond troubles

Fixed income managers have their own Fed-related conundrum of course, which has been further complicated by the apparent split in the Fed. The potential for interest rate rises creates ‘significant risks to capital’ for fixed income investors, according to BlackRock’s head of UK retail sales Jeremy Roberts.

“Our clients have been very vocal about the challenges they are facing in fixed income,” he said. “My response is generally this: don’t attempt to second guess the central banks; instead be prepared to react. I strongly believe the current fixed income environment requires a truly active approach to investing.”

Part of the Bonhill Group.