Erste Asset Management

A masterpiece

A masterpiece
A masterpiece
(c) iStock Photo
Share post:

The US central bank Fed increased the Fed funds rate last Wednesday. The risky asset markets reacted to the move with an increase. At the same time, the US dollar depreciated. How can that be explained?

Boom and stable markets

  • The US economy is currently transitioning from the economic phase of recovery to boom, recording growth rates of above its long-term potential, which is between 1.5% and 2%. The indicators of resource utilisation increasingly suggest full employment. Unemployment has settled at a low 4.7%. The most recent high was set at 10% in 2009.
  • The Fed members have prepared the market participants for the rate hike in numerous speeches. In contrast to the previous year, however, the risky asset classes did not react to the speeches with falling prices. We deduce from that the markets have become more resilient.

The hawks (fight against inflation)

  • The published statement contained a number of hawkish elements, reflecting the fact that the monetary support of the economy is less important than it used to be. After all, the two goals of the central bank, i.e. full employment and price stability, have almost been achieved.
  • In line with this, the Fed increased the bandwidth by 0.25bps to 0.75% – 1.0%. After December 2015 and December 2016, this is the third interest rate hike in this cycle.
  • It is worth noting that the interval to the previous hike has shortened from a year to three months.
  • The Fed also abandoned an important clause in the statement: the central bank has stopped talking about an excessively low rate of inflation.

The doves (economic stimulus)

  • The suggestions that the central bank would continue to act very cautiously have dominated the statement.
  • The median of the expectations of the Fed members with regard to the Fed funds rate still implies only three rate hikes this year. Prior to the interest rate decision there had been speculation about the Fed forecast moving up to a possible fourth hike.
  • The average estimate of the expected Fed funds rate (long-term) remains unchanged at 3%.
  • The estimate of the so-called structural unemployment rate was revised downwards by 0.1 percentage point to 4.7%. Thus, the Fed is signalling that the speed limit for the economic growth at which no inflation risk is created has been slightly adjusted upwards.
  • As a reminder, the Fed pointed out three already known criteria for estimating inflation:
    • the kind of inflation in question is a sustainable increase towards 2%, i.e. the inflation target.
    • In order to support this, the Fed explicitly talks about the core inflation rate exclusive of food and energy. The underlying inflation is still slightly below 2%.
    • The inflation target was called symmetric. This means that periods of inflation of below 2% followed by rates above 2% (and vice versa) are acceptable.

Neither too loose nor to tight

  • The interplay of interest rate and statement was a masterpiece.
  • In reaction to the published Fed statement, the yields of US Treasury bonds decreased, with a slightly lower course of interest rate hikes priced in than prior to the interest rate decision.
  • Remarkably, the difference between 10Y and 2Y benchmark yields has also declined. From the market’s point of view, the Fed is not running the risk of stepping up the inflation risk by tightening the inflation risk only slightly. Rather, the market thinks that the monetary policy is exactly right. The area of inflation that neither suggests deflation nor excessive inflation generally means a favourable environment for risky asset classes.
  • The risk of a clear de-coupling of the Fed from other central banks has fallen, which has led to a decrease in appreciation pressure on the US dollar. In line with this scenario, the risk of a shrinking scope to manoeuvre for the other central banks has reduced. Therefore, the Brazilian central bank can continue to cut its key-lending rates drastically without the Brazilian real coming under pressure. It is no coincidence that it was mainly the currencies from emerging economies that have appreciated against the US dollar.

Epilogue: the area of conflict between a favourable environment for risky assets (higher growth, supportive central banks), low priced-in volatilities, and increased political risk remains intact.


Legal disclaimer

This document is an advertisement. Unless indicated otherwise, source: Erste Asset Management GmbH. The language of communication of the sales offices is German and the languages of communication of the Management Company also include English.

The prospectus for UCITS funds (including any amendments) is prepared and published in accordance with the provisions of the InvFG 2011 as amended. Information for Investors pursuant to § 21 AIFMG is prepared for the alternative investment funds (AIF) administered by Erste Asset Management GmbH pursuant to the provisions of the AIFMG in conjunction with the InvFG 2011.

The currently valid versions of the prospectus, the Information for Investors pursuant to § 21 AIFMG, and the key information document can be found on the website under “Mandatory publications” and can be obtained free of charge by interested investors at the offices of the Management Company and at the offices of the depositary bank. The exact date of the most recent publication of the prospectus, the languages in which the key information document is available, and any other locations where the documents can be obtained are indicated on the website A summary of the investor rights is available in German and English on the website and can also be obtained from the Management Company.

The Management Company can decide to suspend the provisions it has taken for the sale of unit certificates in other countries in accordance with the regulatory requirements.

Note: You are about to purchase a product that may be difficult to understand. We recommend that you read the indicated fund documents before making an investment decision. In addition to the locations listed above, you can obtain these documents free of charge at the offices of the referring Sparkassen bank and the offices of Erste Bank der oesterreichischen Sparkassen AG. You can also access these documents electronically at

N.B.: The performance scenarios listed in the key information document are based on a calculation method that is specified in an EU regulation. The future market development cannot be accurately predicted. The depicted performance scenarios merely present potential earnings, but are based on the earnings in the recent past. The actual earnings may be lower than indicated. Our analyses and conclusions are general in nature and do not take into account the individual characteristics of our investors in terms of earnings, taxation, experience and knowledge, investment objective, financial position, capacity for loss, and risk tolerance.

Please note: Past performance is not a reliable indicator of the future performance of a fund. Investments in securities entail risks in addition to the opportunities presented here. The value of units and their earnings can rise and fall. Changes in exchange rates can also have a positive or negative effect on the value of an investment. For this reason, you may receive less than your originally invested amount when you redeem your units. Persons who are interested in purchasing units in investment funds are advised to read the current fund prospectus(es) and the Information for Investors pursuant to § 21 AIFMG, especially the risk notices they contain, before making an investment decision. If the fund currency is different than the investor’s home currency, changes in the relevant exchange rate can positively or negatively influence the value of the investment and the amount of the costs associated with the fund in the home currency.

We are not permitted to directly or indirectly offer, sell, transfer, or deliver this financial product to natural or legal persons whose place of residence or domicile is located in a country where this is legally prohibited. In this case, we may not provide any product information, either.

Please consult the corresponding information in the fund prospectus and the Information for Investors pursuant to § 21 AIFMG for restrictions on the sale of the fund to American or Russian citizens.

It is expressly noted that this communication does not provide any investment recommendations, but only expresses our current market assessment. Thus, this communication is not a substitute for investment advice, does not take into account the legal regulations aimed at promoting the independence of financial analyses, and is not subject to a prohibition on trading following the distribution of financial analyses.

This document does not represent a sales activity of the Management Company and therefore may not be construed as an offer for the purchase or sale of financial or investment instruments.

Erste Asset Management GmbH is affiliated with the referring Sparkassen banks and Erste Bank.

Please also read the “Information about us and our securities services” published by your bank.

Subject to misprints and errors.

Leave a comment Required fields are marked with *

Your email address will not be published. Required fields are marked *