Increasingly hawkish language from the Federal Reserve

us-fed-reserve

Although US economic growth proved somewhat disappointing during the final quarter of 2016, Fed policymakers appear ready to increase interest rates as soon as it becomes appropriate; indeed, Fed Chair Janet Yellen warned that an unnecessary delay in tightening could prove “unwise”.  Meanwhile, European investors faced fresh uncertainties surrounding Greece’s financial bailout.

Leading equity markets generally ended February in positive territory. In the US, the Dow Jones Industrial Average Index reached new heights during the month; however, its rise was dampened at the end of February by news of weaker-than-expected economic growth.  The US economy expanded at an annualised rate of only 1.9% during the final quarter of 2016, compared with third-quarter growth of 3.5%.

The Federal Reserve (Fed) opted to maintain its key interest rate at a range of 0.5%-0.75% at its February interest-rate-setting meeting. Many Fed policymakers believe it might become appropriate to instigate further tightening measures “fairly soon” if inflation and unemployment data meet or exceed current expectations. Meanwhile, in her testimony to Congress, Fed Chair Janet Yellen warned that an unnecessary delay in increasing US interest rates would be “unwise”.  Investors generally construed her comments as a positive assessment of the domestic economic outlook.  Over February as a whole, the Dow Jones Industrial Average Index rose by 4.8%.

“Many Fed policymakers believe it might become appropriate to instigate further tightening measures “fairly soon”

During February, the Bank of England (BoE) upgraded its predictions for the UK’s economic growth in 2017, raising its forecast from 1.4% to 2%. Looking further ahead, however, growth is expected to moderate to 1.6% in 2018 as rising inflationary pressures squeeze household spending. The UK’s rate of inflation rose at an annualised rate of 1.8% during January, reaching its highest level since June 2014. The FTSE 100 Index rose by 2.3% over the month.

Investor sentiment in Europe was undermined during February by fresh discord over Greece’s financial bailout.  The International Monetary Fund (IMF) warned that, “despite Greece’s enormous sacrifices and European partners’ generous support, further relief may well be required to restore debt sustainability”. However, European leaders appear reluctant to make further concessions ahead of crucial elections in key countries, including France, Germany, and the Netherlands. The Athens Composite Index experienced some pronounced volatility during February, but ended the month 5.6% higher. Elsewhere in the region, Germany’s benchmark Dax Index and France’s CAC 40 Index rose by 2.6% and 2.3% respectively.

Japan’s economy posted annualised growth of 1% during the fourth quarter of 2016. Although ongoing weakness in the yen provided a boost for export activity and business investment, domestic demand languished. Over 2016, Japan’s economy expanded by 1%, compared with growth of 1.2% in 2015. The Nikkei 225 Index rose by 0.4% over February as a whole.