Macro Monthly A healthy pause

• In an important regime shift, a notably more dovish statement and press conference following January’s FOMC meeting confirmed the Fed is not committed to any further rate hikes this cycle 
• We believe that US monetary policy should not now be on investors list of major concerns for 2019 - nor an obstacle for further healing in risk assets over the coming year
• Further hikes are only likely if core inflationary momentum, which remains muted, accelerates sustainably in concert with improving external demand
• In our view, investor concerns that this shift in policy regime is evidence that the Fed has already overtightened are misplaced 
• A more accommodative Fed policy is likely negative for the USD, supportive to risk assets and particularly helpful for emerging market debt.

Since the Fed now seems likely to tighten only with a sustained pick up in core inflation and an improvement in ex-US demand growth, the probability that US policy will be a major headwind for risk assets in 2019 appears low. Moreover, to the extent markets had priced in a Fed policy mistake, this risk premia should continue to unwind in the wake of the Fed's unequivocally dovish late-January communication. This is not to say there are not key downside risks to risk assets—cooling global growth, peak margins, and geopolitical uncertainty are just a few. But the Fed is unlikely to be one of them, at least not for most of this year. And the Fed pause is raising the probability that this historically long expansion lasts even longer. We remain constructive on global equities and think a patient Fed will contribute to meaningful USD weakness over the medium term. In that context, we are particularly positive on emerging market debt, where we have added exposure of late.