EUR 45.60 For Business Accounts Only

Economy Resilient and Fed Resolute

​This week’s note has two main points: One regarding the Fed, the other regarding rates markets.

• The Fed remains on track for rate hikes in June and September   MIG has been sanguine about the resilience of the US economy and the resolve of the Fed to normalize policy. Economic data and markets are just now catching up. Looking ahead, the FOMC may consider upgrading their forecasts for employment at their June meeting. However, they are not likely to upgrade their outlook for policy just yet.

• Reduction of Fed’s bond holdings is likely to have a significant impact on long-term rates. With the intense focus on pace of rate hikes, markets are missing a bigger story here. The rationale is pretty straightforward: even after dropping the policy rate to zero, the Fed could only reduce 10-year Treasury rates to just under 4%. It took several rounds of QE programs to further compress term premia and drive 10-year rates under 3% where they remain today. It only follows that as the Fed eases up on their bond holdings, term premia will expand – and probably not as gradually as they declined.