Philippe Ithurbide and Bastien Drut are respectively global head of Research, Strategy and Analysis and fixed-income strategist in the Strategy and Economic Research team at Amundi.
For a few years now, the central banks have had the habit of preparing the financial markets and economies for changes in monetary policy, but the reversal of a seven-year-long ultra-accommodating monetary policy, the Fed’s, is obviously more important than usual.
In our opinion, there is no urgency or need to start a real tightening cycle or normalise monetary policy, and this viewpoint is widely shared throughout the financial markets, if forward curves are any indication.
The US economy can probably withstand some interest rate increases; the global economy, probably a bit less; and the financial markets (especially emerging ones), less still.
This means that the Fed’s message is now absolutely crucial. Misinterpretation of the Fed’s decisions remains a significant risk factor.
In all, the Fed will probably make an opening gambit at the next FOMC on 16 December, but it will stay in very gradual mode and, at the most, would tighten by 25 bp per quarter: in this case, the fed funds rate would reach only 1.50% at the end of 2016 (+125 bp compared to today, but there are reasons to believe that the Fed’s rate of tightening will be even slower, with a terminal rate target that is much lower than in previous cycles (less than 3%, far less than what the ‘dots’ suggest).
Betting on low long-term rates and a flattening of the US curve still makes just as much sense.