<p><span style="font-family: Calibri;" face="Calibri"><span style="font-size: medium;" size="3">The US Fed left the target funds rate unchanged at 1.5 to 1.75%. The notable change was the addition of the word “symmetric” to its 2% inflation objective. </span></span></p><p></p><p><b><span style="text-decoration: underline;"><span style="font-family: Calibri; font-size: medium;" face="Calibri" size="3">Fed Funds rate left unchanged</span></span></b></p><p><span style="font-family: Calibri; font-size: medium;" face="Calibri" size="3">In the May meeting, the Fed target funds rate remained the same at 1.5 to 1.75%. The next rate hike is likely to occur in the June meeting. The Fed Fund futures has priced in 100% probability for interest rates to be at 1.75 to 2.0% in the next meeting.</span></p><p></p><p><b><span style="text-decoration: underline;"><span style="font-family: Calibri; font-size: medium;" face="Calibri" size="3">Economy to accelerate</span></span></b></p><p><span style="font-family: Calibri; font-size: medium;" face="Calibri" size="3">The US Fed expects the economy to accelerate with the boost coming from fiscal stimulus. Business fixed investment are also expected “to grow strongly”, an upgrade from moderate level. On economic risks, they appear “roughly balanced”. The improved assessment of the economic growth could pave the wave for more rate hikes this year. </span></p><p></p><p><b><span style="text-decoration: underline;"><span style="font-family: Calibri; font-size: medium;" face="Calibri" size="3">Not a dovish interpretation</span></span></b></p><p><span style="font-family: Calibri; font-size: medium;" face="Calibri" size="3">Inflation is expected to run near the Fed’s “symmetric 2% inflation objective over the medium term”. The market appears to interpret the addition of “symmetric” as dovish. </span></p><p><span style="font-family: Calibri; font-size: medium;" face="Calibri" size="3"></span><span style="font-family: Calibri; font-size: medium;" face="Calibri" size="3">We caution against the dovish interpretation. The Fed could be anticipating inflation to be more persistent in the coming months and it is preparing the market for it. Previously, the US Fed has not been afraid of inflation and was more concern of deflationary pressure. Only recently has inflation crept back up with the March core PCE inflation (y-o-y) at 1.9%. The Fed is now expecting inflation to move “close to 2 percent” from “continued to run below 2 percent”. Therefore, there is a paradigm shift to be more cautious of inflation. The addition of “symmetric” could be a hint that it is less generous of inflation overshooting its 2% target. </span></p><p><span style="font-family: Calibri; font-size: medium;" face="Calibri" size="3"> <span lang="EN-GB">The Fed has clearly signalled its intention to watch inflation. Should inflation continue its upward climb, the Fed might be forced to hike rates more aggressively.</span></span></p><p class="justifyleft"><span style="font-family: Calibri; font-size: medium;" face="Calibri" size="3"><span lang="EN-GB"><img width="400" height="240" src="111.png" /></span></span></p><p><span style="font-family: Calibri; font-size: medium;" face="Calibri" size="3"><span lang="EN-GB"></span></span></p><p><i><span lang="EN-GB"><span style="font-family: Calibri; font-size: medium;" face="Calibri" size="3">Source: Bloomberg</span></span></i></p><p><span style="font-family: Calibri; font-size: medium;" face="Calibri" size="3"><span lang="EN-GB"> </span></span></p><p><b><span style="font-family: Calibri; font-size: medium;" face="Calibri" size="3">Edmund Chan, CFA</span></b></p><p></p>