The market’s easy view of the Fed meeting was taken from the dot plot. This plot shows the estimates of each member of the rate setting committee of where they think the policy rate should be at the end of the next three years. More members put themselves into the category for one to two rates hikes this year than back in April. Rather than interpreting this as increasing the probability of further delays by the Fed, it could be taken as a growing consensus among its members that one or two steps on the tightening cycle are appropriate for this year.
The market pricing is still some way off the Fed’s projections, and at best, the market is looking for one rate hike this year, as shown by the Fed Funds futures. This dislocation between the market and the Fed has the potential to create volatility in the lead-up to the September meeting. This seems a perfectly natural response given just how long everyone has been waiting for this event.
However, there are a few things investors should remember about that first rate hike. It is not the first move by the Fed – or the Bank of England for that matter – that investors should be really concerned with – it is the last. Moving away from the zero-rate policy is a clear signal of economic health and an environment in which markets can move higher. That last move, however, is a deliberate attempt to slow down an overheating economy.
Furthermore, monetary policy will still be extremely accommodative and supportive of markets, and the tightening cycle is likely to be extremely gradual as the Fed will be slow and steady – much like the economy so far. One-nil to the tortoise.
Kerry Craig is global market strategist for JP Morgan Asset Management
