The Federal Open Market Committee (FOMC) has held rates steady, but this is still being considered a dovish meeting. Although the markets have been clamouring for rate cuts to be seen in 2019, no cut was expected today. However, the big market reaction is coming on what the Fed is signalling for future meetings. What are the key factors out of this FOMC meeting.
The main takeaway
Is that although the Fed has not explicitly signalled a rate cut is coming (nothing as such in the statement, the groundwork is being laid for a cuts. Looking at the dot plots there is a move coming. The dovish (and cautious) language in statement is a reflecting a shift towards a rate cutting cycle from the Fed. Powell also noted that those on the committee that did not call for a cut in 2019, were not far off.Treasury yields are lower, the dollar has slipped, whilst equity markets are taking this as a positive.
The chart below show that CME Group Fed Funds futures are now calling for a rate cut in 2019 probability being 100%.
Changes to the FOMC Statement
The Statement has dropped the term “patient” and has replaced it with a comment that it would “closely monitor the implications of the incoming information”.
Also the “uncertainties about this outlook have increased”. This is a big nod towards the uncertainties of President Trump’s trade policy.
The other interesting feature was that James Bullard dissented and called for a 25 basis point rate cut. Bullard is a deeply held dove and if anyone was going to dissent, it was probably going to be him. However, this is a dissent nonetheless and reflects the balance is ready to shift.
FOMC dot plots
The big move has been that the FOMC is very uncertain across the committee for both its 2019 and 2020 projections. Whilst 2019 is still not calling for any cuts (according to the median on the Economic projections), there is a wide range of views.
As we can see below from March, the views for 2019 were very steady.
For this meeting, the dots for 2019 are all over the place, even though the median is still for 2.4%. According to Powell in his press conference, a number of participants that held steady on their 2019 projections noted that the case for potential cuts has strengthened. This would suggest the bar to a rate cut in 2019 is very low.
Also, for 2020 though there is a shift and the Fed is projecting for a cut of 25 bps (back in March it was a hike of 25 bps, therefore a shift of 50 bps lower).
Projections for 2021 (i.e. two years out) should probably be taken with a pinch of salt. These could be turbulent times ahead and although the Fed is calling for a hike back up again, history tells us that the Fed does not cut once and then stop.
FOMC economic projections
What is remarkable is that the Fed has barely changed its forecasts. Growth has actually been raised to +2.0% in 2020, whilst unemployment projection has been lowered by -0.1% across the forecast horizon. Both of these are hawkish. However, this is balanced by concerns over inflation projections. The headline PCE has been slashed, but the Fed looks more at core PCE which has been cut to 1.8% this year and 1.9% in 2020. The Fed must be concerned that perhaps the inflation decline may not simply be “transitory”. It is expected to pick up at a “slower pace than expected” according to Powell in his press conference.
The market is taking this meeting as enough to meet expectations. With yields falling, the dollar is under a degree of pressure, whilst equities are climbing (albeit marginally). Gold is also higher and looking to breakout again.
- Treasury yields – with yields lower there has also been a big curve steepener. The US 10 year yield falling -5 bps, whilst the US 2 year yield has fallen -10 bps. This is a nod to both the cut in inflation expectations and also the likelihood of a rate cut to come through this year.
- EUR/USD (+25 pips) – a rebound on the euro, with the move opening the $1.1265 near term pivot.
- GBP/USD (+35 pips) – a huge rally today as UK inflation held up. A close above $1.2650 would be a significant move to a rebound for $1.2700. How long can this rebound last, given the difficult UK political outlook for sterling.
- USD/JPY (-35 pips) – A close below 108.00 heightens the negative pressure, whilst below 107.80 would be key.
- Gold (+$7) – The move above $1348 increases the potential for a sustained break. A close above $1348 is bullish.
- S&P 500 (+5 ticks) – not massive reaction on equities