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A Dovish Hike

17 March 2017 by lberuti

At the end of their meeting, the FOMC decided to raise interest rates on Wednesday. As expected by the market, they delivered a 25bps hike to the Fed funds rates. They also only made minor changes to their projections, and in her press conference, Mrs Yellen largely reaffirmed that there was no change in the Fed’s thinking of the economic or policy outlook. She also added that 2% inflation is a target rather than a ceiling and acknowledged that it could temporarily shoot above that level. That part probably took the market slightly off guard, investors having positioned themselves quite defensively ahead of the decision. That led to some eye-catching moves on interest rates, with 2y and 10y US rates rallying roughly by 10bps. The effect was also felt in the credit market, and indices moved aggressively tighter after the decision – they are back to the tightest levels of the current series, ie 70bps for iTraxx Main and 61bps for CDXIG -. The results of the Dutch general elections also played their part and added another feel-good factor, but anyone who would not be aware of the actual FED’s decision would be forgiven to assume they had stayed put!