Salman Ahmed, Chief Investment Strategist

Hawkish signals from Federal Reserve with interest rate rise

Salman Ahmed, Chief Investment Strategist at Lombard Odier Investment Managers, comments following the Fed rate decision:

Yesterday's meeting of the Federal Reserve saw the US central bank hike interest rates by 25bp, only its second hike in a decade. However, the key development was the shift higher in the 2017 "dot plot", which now shows three hikes rather than two for next year. This met with a hawkish market response, further intensified by comments from Fed Chair Janet Yellen that appeared to support, rather than the downplay, the hawkish signal.

Overall, we continue to believe that faster rate rises than we have experienced so far are likely in the US, but having said that the ongoing sharp rise in US Treasury yields and the dollar will start to become a binding constraint on how fast the Fed can move in 2017, as its tightening policy starts to hit risk sentiment.

Ultimately the Fed's signal seems to have shifted in expectation of a potential fiscal "bazooka" from the incoming political administration, once again highlighting that US economic and policy outcomes are now more likely to be determined by fiscal than monetary policy.

In terms of investment implications, we continue to prefer credit risk over duration as the US policy mix shifts, and we maintain our focus on quality-based portfolio construction to weather the current storms.


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