What are the implications for financial markets of the Fed hike?
The Fed tightened policy for the first time in nearly a decade and the decision was unanimous, notes Australia New Zealand (ANZ).
The Fed's forecast for the policy path is little changed, but there is greater consensus among policy members about that path. The fear of the first hike should now give way to more reasoned analysis. Markets are not priced for strong US data over the next few months.
Based on recent inflation dynamics we expect the next hike to come in Q2 2016. We anticipate a more gradual tightening cycle than the Fed, but steeper than the market," ANZ projects.
Financial Market Implications
"For markets there has clearly been an element of caution priced into markets ahead of today's announcement. This is also something which was likely demonstrated in the tone of the questions put to Yellen. It was nearly an hour into her press conference before Yellen received a question related to the possible upside risks. Until then, the questions had all focussed on downside risks.
This positioning/sentiment issue has likely accounted for the relatively colourful market response to today's Fed announcement. US front end yields rose in response to the announcement, but the initial stronger USD response was fully reversed to show weakness, and then reversed to show strength, and the initial selloff at the long end was reversed to show a rally, and then reversed to show a selloff.
In addition, the absence of a calamity in response to today's announcement is likely to further remove the fear element from analysis of the Fed, and shift the focus in favour of the data. We retain a view that yields are in a (modest) bear market, and the USD is in a bull market, primarily against the commodity and Asian currencies," ANZ projects.
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