Tune in to our insights.
- During the January’s FOMC meeting, the Fed committed to taking a breather in rate hikes. This is an important regime shift.
- Given this shift, the Fed should not be on investors’ list of major concerns for 2019
- The Fed’s current policy is likely to be negative for USD, supportive of equities and positive for emerging market debt.
Why is the Fed not increasing rates further for this cycle?
The Fed has witnessed the
- sharp tightening of financial conditions at the end of last year,
- volatility in risk assets,
- cooling of global growth, and
- moderation in business and household investment.
It is now sitting back to evaluate the effects of its prior tightening (i.e Fed raised rates in 2018 and this was a headwind for risk assets).
However, the Fed also indicated that it stands just as ready to cut rates as it does to hike them should it prove necessary.
Has the Fed raised interest rates too much?
What will make the Fed resume interest rate hikes?
The Fed is only likely to resume rising rates if core inflation accelerates sustainably in concert with an improving demand environment outside of the US.
And with rent and healthcare prices moderating and lower energy prices in the US, it is unlikely that underlying price pressures in the US are going to accelerate meaningfully (i.e. inflation remains muted), at least in the first half of 2019, despite still tight labor markets.
The bottom line: Asset Allocation
The Fed’s interest rate policy is not likely to be a key risk for risk assets, at least not for most of this year.
And the Fed pause is raising the probability that this historically long expansion lasts even longer.
Our asset allocation team is:
- positive on global equities;
- positive on emerging market debt and have added exposure lately;
- think the USD will weaken meaningfully over the medium term