Focus turns to US data after Fed rates threat
While there was little change to the Fed’s economic forecasts compared to December, committee members certainly moved the dial on the likely future path of rates. The committee members’ median expectation for the Fed funds rate at end 2015 moved from 0.75% to 1%, with a further move from 1.75% to 2.25% for rate levels by end 2016. Essentially, this implies two additional 25bps rate hikes compared to what committee members had previously indicated and the markets had priced in.
In a further torpedo for markets, new Fed Chair Janet Yellen hinted that the Fed is likely to keep rates on hold for about six months only, after its asset purchase programme ends, which is expected to be this autumn. This suggests rates will start to be hiked next spring rather than the second half of 2015 as the markets had expected. Equities sold off on the news, bond yields jumped, while the dollar made broad-based gains.
