The Colonial First State Global Asset Management (CFSGAM) economic research report, US Federal Reserve: Bring it on home said the sharp rise in equities was the result of the “FOMC’s commitment to low interest” and US Federal Reserve chair Janet Yellen’s “relatively upbeat assessment of the US economy in her press conference”.
“In response, the S&P Index rose by 0.8 per cent to 1,957 points, the 20th all-time high reached this year,” said the CFSGAM report.
CFSGAM senior analysts said investor anxiety regarding market swings was also down following the statement, with the Chicago Board Options Exchange Volatility Index declining to 10.61 points.
While CFSGAM said the US Federal Reserve has projected US real GDP growth in 2014 is now estimated to be between 2.1 per cent and 2.3 per cent, down from the March projection of between 2.8 per cent and 3.0 per cent, this still suggests GDP growth will be 3.0 per cent at an annualised pace in the final three quarters of this year.
Following the “significant improvement in the US labour market” the report said the FOMC has lowered projections for the 2014 unemployment rate to 6.0 to 6.1 per cent, down from 6.1 to 6.3 per cent.
CFSGAM said the statement by the Federal Reserve has also seen US Treasuries rally in the middle and at the long end of the curve.
“US Treasuries rallied sharply overnight across the curve,” said CFSGAM senior analysts.
“While the FOMC meeting decision was broadly in line with our expectations, market participants saw the statement as being more dovish.”
Despite Dr Yellen’s dismissal of recent US inflation data, CFSGAM said in the report that it still expects “some inflation risks to arise this year from a combination of rising shelter costs, firmer wage growth, reduced economic and labour force slack, less disinflation from the sequester spending cuts on medical services, together with improving domestic and global growth outcomes”.
“Under circumstances where a quickening in inflation occurs on the back of further improvement in economic growth and lower unemployment rates, financial market participants may ‘force’ the Fed in the direction of accelerating its forward guidance later this year,” said the report.
CFSGAM said upside risks to inflation could lead the Fed to “increase interest rates more aggressively than markets are currently anticipating”.
