From Coutts:

We see the combination of the US Federal

Reserve’s (Fed) revised stance on employment,

its comments on the housing market, and the

sheer number of Federal Open Market

Committee (FOMC) members expecting a rate

rise before 2014, as a general indication of

increased hawkishness within the Fed. The

chances of a third round of quantitative easing

(QE3), in our view, therefore, now appear less

likely. This subtle shift potentially heralds an

upcoming opportune entry point into markets.

Earlier this week the FOMC, the Fed committee

responsible for setting interest rates, left rates on hold and

pledged to keep them very low until the end of 2014. The

committee repeated its commitment to keep the Fed’s

"balance sheet under review" and reiterated its willingness

to "act as appropriate". While all this was broadly in line

with previous FOMC pronouncements, we did see some

shifts in stance, particularly the assessment that growth is

"expected to pick up gradually" and that the housing

market was showing some “signs of improvement”.

In the FOMC press conference, Ben Bernanke, the Fed’s

chairman, continued to express the view that the recent

steep drop in unemployment would not be sustained.

However, this seems in stark contrast to purchasing

managers’ indices (PMIs), which suggest that the positive

trend in employment will continue. Indeed, this index

forms part of our rationale as to why we see a third round of

quantitative easing (central bank asset purchases), as less

likely. Nevertheless, despite expecting a slowdown in the

recent positive trend, the Fed did revise-up its

employment forecast to reflect the improvement in hiring.

The Fed’s forecast for unemployment now stands at 7.8-8%

for year-end 2012, from 8.2-8.5% in January, and 7.3-7.7%

for 2013.

On inflation, the FOMC nudged up its forecast by 0.35% to

1.9-2%. It was interesting to see that 13 out of 17 members

expect at least some sort of increase in rates before the end

2014 – this means that only four members expect no rate

rise! While all FOMC members make forecasts, only some

members have a vote and, conveniently for Bernanke, who

seems to retain a more dovish stance, four of the most

hawkish have no vote this year.

Overall, the FOMC statement and press conference gave

no signal that the Fed was actively considering another

round of QE. The major risk to this view is that

employment data deteriorates significantly between now

and the end of June, when ‘Operation Twist’ (the swap of

short-term debt with long-term debt to extend the average

maturity of the Fed’s balance sheet) ends.

In the past, an end to QE has typically led to a short-term

correction in risk assets. Thus it follows that the end of QE

in June could potentially represent an opportune entry

point into risk assets.