Fed : Chi va piano, va sano e va lontano

One year on from the first hike, Janet Yellen has finally decided to raise the Fed funds rate by 25 bps to 0.75 pct. Even though the FED has constantly reviewed downwards its dot plots in the past two years, the message delivered by the latest FOMC points clearly towards an acceleration of monetary normalization. Monetary Policy Committee members thus anticipate up to 3 hikes in 2017 and a further 3 in 2018. Nonetheless, next year, the FED will have to take a balanced approach. The increase in US long rates associated with the rise in the dollar has led to a worsening of financial conditions in the US and could impact 2017 growth by more than 0.3 pct. On the other hand, rising inflation (and anticipations of inflation) is being fuelled by the stimulus measures that President Trump could introduce. If they are all implemented, US growth could increase by almost 1.5 pct over the next two years, and inflation spiral slightly more out of control.

Caught between both these risks, Janet Yellen has therefore embarked down the narrow path of exceptional monetary normalization after almost 10 years of highly accommodating monetary policy. Such a process, although necessary, is not risk-free and will keep us cautious on US government bonds, to which we shall prefer inflation-linked bonds.

What is the impact on the market ?