In what was one of the more highly anticipated Federal Reserve decisions of the past few years, the Federal Open Market Committee (FOMC) in December voted unanimously to raise rates by 0.25% to a target Fed Funds rate of 2.25% to 2.50%. The Fed’s focus was on continued strong US economic data from Main Street, rather than on swooning equity and credit markets on Wall Street. The Fed continued to focus on strong US GDP growth, underpinned by strong employment and inflation near their 2% target, rather than being driven by concerns about near-term weakness in global growth and tightening financial conditions. The market was expecting a dovish hike, but was caught off guard by the tone of the statement and the press conference, which was perceived as not being dovish enough.
From an investment perspective, despite the Fed’s less accommodative posture, we are beginning to see value in credit markets. Investors are now being better compensated for risk. We believe the rally in Treasuries has gotten ahead of itself and Treasuries are starting to price in a recession. But we see little risk of a recession in the coming year. On the USD, we believe that the upward pressure on the US Dollar should begin to wane as we have probably seen the maximum interest rate differentials between the US and other developed markets.
Fany De Villeneuve
UK - International Press Relations
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