First Fed Rate Hike, with More to Come

December 17, 2015 — Eye on the Market

• As we expected, the US Federal Reserve (Fed) raised the target for the Federal Funds rate by 25 basis points. The forecasts of the Federal Open Market Committee (FOMC) for the evolution of rates over the coming years (the “dot plot“) remained broadly unchanged, with four further hikes assumed in 2016. The forecast for growth in 2016 was raised slightly, and the inflation forecast lowered slightly.
• We believe that growth momentum in the US economy will remain robust, despite the rate hike and notwithstanding recent stress in segments of the US bond market, and that core inflation will continue to rise gradually. This implies that short-term rates will probably rise faster than the two hikes that the markets are currently discounting for 2016.
• As a result, government bonds in the USA and other major markets are likely to lose some ground in the coming months. Equities should hold up, but volatility is likely to remain high and returns quite low. The upside for the US dollar is typically limited in the early stages of the hiking cycle, but could return to see gains later in 2016.

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