US policy outlook

Fed doves are pretending to be hawks

The Fed still has the same broadly dovish view of US prospects – despite its hawkish rate rise.


The 0.25% Fed rate hike was no surprise, as the Fed members had been carefully appearing more hawkish in recent weeks.


But Janet Yellen, the chair of the Fed, was careful to remind investors that the Federal Open Market Committee (FOMC) had not changed their “views about economic risks,” that monetary policy remained “accommodative” and that the interest rate hike does not “reflect a reassessment of the economic outlook.”


This view was supported by only minimal changes to the Fed’s outlook. Economic forecasts were only slightly changed and the accompanying “dot plots” (individual FOMC member forecasts) suggested only two more rate rises were likely in 2017. 


Markets quickly realized that these were doves playing hawks and reacted accordingly with Treasury yields and the USD falling while equities rose. 

“The Fed’s less aggressive tone was appropriate”

But we think that the Fed’s less aggressive tone was appropriate, given the tepid growth in consumer spending and looming political risks this year. Our base case remains the Fed raises interest rates twice more this year, with the next hike coming in June.