Federal Reserve chair Janet Yellen may have announced a second rate rise in four months, but cannot escape being branded a dove by fund managers.
On Wednesday the Federal Open Market Committee said it would increase its benchmark federal-funds rate by 25% to a range between 0.75% and 1%.
The move was widely anticipated by markets and in line with expectations set out by the Fed when it last raised rates in December 2016, then the second hike since the financial crisis.
At the time it forecast three hikes in 2017, a target for which it is on course.
Despite a second rate hike just three months later, after waiting eights years for the first and then a further 12 months for the second, veteran bond manager Bill Gross branded Yellen ‘a dove at heart’ highlighting her cautious tone in announcing the rise and comments about future increases.
In her conference on Wednesday Yellen said the Fed did not take into account potential fiscal stimulus, despite the fact the Trump administration is expected to introduce infrastructure spending and tax cuts which could drive inflation higher and trigger the Fed to pump the brakes by raising interest rates.
Yellen said the decision to raise rates was based off employment and inflation figures being on target rather than the expectation of future growth driven by fiscal stimulus.
‘Some participants have pencilled in some fiscal policy changes into projections, however nothing has been done to anticipate pre-emptive action to policy moves,’ she said.
She added that the decision to raise rates ‘does not represent a reassessment of the economic outlook or of the appropriate course for monetary policy’ emphasising that further rates would be gradual.
‘Yellen is disposed to be dovish,’ Gross (pictured above), who runs the Janus Global Unconstrained Bond fund, told CNBC. ‘She critically fears that markets, that asset prices are subject to downturns, in some cases significant downturns…so she wants to move on a gradual basis.’
‘She acknowledged strong employment numbers and that real growth is improving but I think Janet Yellen is basically a dove at heart and we are going to see that over that over the next 12 to 24 months. We are going to see 50 basis points over the next 12 months and another 50 for the next 12 months thereafter.’
Western Asset’s Julien Scholnick said the Fed statement did not show it has changed its growth outlook and that Yellen’s focus was improved data.
‘What was their motivation to pulling forward this rate hike that people were not expecting until recently?’ he said. ‘In our mind it’s that financial conditions have eased pretty significantly over the last couple months.’
‘Equity prices have risen, the dollar has moved down slightly, corporate borrowing costs have declined and so this is a more favourable financial environment. In the Fed’s mind these conditions can provide some modest support to growth in the coming quarter.’
Scholnick added: ‘They know they’ve been wrong on their assessment of growth for the past five years and so I think they’re cautious. I don’t think they want to project any confidence in areas that they can’t really forecast.’
While Yellen shied away from forecasting the effect of fiscal stimulus on Fed policy, Rick Rieder (pictured above), BlackRock chief investment officer of global fixed income, said it would be a driver for normalization from the central bank and saw the committee even moving up to four times this year.
‘We are optimistic on the potential for fiscal policy to spur growth, which would allow the Fed to continue down its path of policy and rate normalization. Alternatively, if policy disappointment ensues toward the middle to latter parts of this year, we could see the Fed pause.
‘While that isn’t our base case, and we anticipate the Fed moving three, or perhaps even four, times this year, a lack of policy implementation would severely brake that dynamic. We think the legislative process needs time to play out, but expectations/optimism is running quite high right now, so a disappointment would be a blow to markets.’