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Markets Counting on Fed to Keep Its Word 

Franck Dixmier 

 

Franck Dixmier

5/1/2017 

No news should be good news after the next FOMC meeting, says Franck Dixmier. The markets are watching the Fed’s actions and like what they see; the Fed, for its part, views things the same way while keeping one eye on financial stability.

Walking the talk

The FOMC's plan is to raise interest rates two more times this year, in June and September
The Federal Open Market Committee has clearly spelled out its policy priorities for 2017 and beyond, and we expect the Fed will continue to "walk the talk" in the actions it announces after its May meeting. The FOMC’s plan is to raise interest rates two more times this year, in June and September, and the "dot plots" on average are signaling three hikes in 2018. We see no reason for this to change.

The financial markets have been fairly agnostic so far about the prospect of future rate hikes, and they should take the upcoming news from the Fed in stride. There is, after all, not much to debate about the how the US economy is doing in terms of the Fed’s two official focus areas: Employment is almost full, and price stability is very close to the Fed's 2% target.

Unofficially, the Fed also keeps an eye on financial stability, which is currently very good. The equity markets are at record highs and the Treasury market is steady.

Hiking rates at a measured pace

The Fed is still deliberately behind the curve, intentionally not raising rates at a pace that keeps up with inflation
As a result of all these factors, we expect the Fed will continue to gradually normalize its monetary policy by hiking rates at a measured pace and by taking small steps to reduce its $4.5 trillion balance sheet, most likely beginning in the fourth quarter.

Overall, the Fed is still deliberately behind the curve, intentionally not raising rates at a pace that keeps up with inflation. The Fed clearly could have found all the justification it needed to start tightening two years ago, but it chose not to in order to continue supporting higher prices.

Behind the scenes, the Fed is also factoring in the aggressively loose monetary policies at work in Japan and Europe. Policymakers know that if they were to tighten too much, the US dollar would strengthen against other currencies and hurt the US in the de facto currency war that is currently playing out in the markets.



The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.



Allianz Global Investors Distributors LLC, 1633 Broadway, New York, NY 10019-7585, us.allianzgi.com, 1-800-926-4456.

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