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US Federal Reserve Postpones Lift-Off

Federal Reserve (Fed) policy makers leave interest rates unchanged. Although confidence in the US economy remains, the Fed cites global economic concerns in its decision.

The US Federal Reserve (Fed) left the target range for the Federal Funds (FF) rate unchanged at 0–0.25% at yesterday’s Fed policy meeting. We had been looking for a first rate hike of 25 basis points (bp), though financial market pricing had suggested less than a 50% probability of a FF hike. In her press conference, Fed Chairwoman Janet Yellen pointed to heightened economic uncertainty abroad as a main reason to refrain from raising the policy rate in addition to a continued undershoot of the inflation rate. On inflation, the Fed indicated that they are still comfortable with reaching their 2% target in spite some counteracting temporary forces (e.g. commodity prices).

Positive Reaction of Bond Markets, Mixed Reactions in Equities

In the accompanying policy statement and projections, participants of the meeting are projecting the “appropriate policy rate” to rise to 0.4% by year-end 2015, to 1.4% by year-end 2016, to 2.6% by year-end 2017 and to be 3.5% in the long run. The inflation projections for 2015–2017 and the GDP growth forecasts for 2016 and 2017 were lowered slightly. While bond markets reacted positive on the news with 10yr US treasury yield falling by 10 basis points, equity markets showed a rather mixed reaction with the S&P Index losing 0.26%. The EUR/USD has – on the back of the visible drop in front end US Treasury yields – risen to just over 1.14.The first take of our economists is a rate hike delay to December 2015 with a flatter hiking path than initially projected.

Dovish Risk Scenario Seems to Materialize

At its ad hoc meeting, the Global Investment Committee has acknowledged that our 40% probability dovish risk scenario now seems to materialize which includes a neutral to positive initial impact on bonds, a neutral to negative first reaction for equities and the USD consolidating instead of strengthening. The Fed’s dovishness and our cyclical indicators are a positive, but given a continued consolidating technical pattern and heightened volatility the Committee remains unconvinced about an equity upgrade. We therefore confirm our neutral view on equities including the regional calls with preferences of EMU and Swiss equities over emerging markets. Regarding European equities, we will have to watch closely EUR/USD developments and possible subsequent action by the European Central Bank (ECB) to counteract possible temporary EUR strength.

Negative View on Fixed Income

We also continue to have a negative view on fixed income for our 3–6 months investment horizon which is also strongly supported by our technical analysis. In addition, the dovish Fed view is consistent with our spread view on high yields outperforming emerging market bonds. In addition, no changes have for now been made to the commodity and foreign exchange views. The Global Investment Committee will meet at its regular meeting next Wednesday.