Fed Sounds Completely Neutral | Investing.com

With seemingly every member of the Federal Reserve emphasizing that the central bank would be “patient” following its December interest-rate hike, it came as no surprise that the Fed left unchanged on Wednesday. And, despite the speculation that Chairman Powell and Company could revisit their balance sheet rundown strategy, the central bank was quiet on that front as well.

In other words, there were no surprise changes to monetary policy itself. That said, there were some interesting hints about how policymakers see monetary policy evolving over the rest of the year. The key changes to the follow (emphasis mine):

  • Economic activity rising at a “solid” rate (downgrade from “strong”)
  • Added a clause acknowledging that “[M]arket-based measures of inflation compensation have moved lower in recent months…”
  • Removed comment on “some further gradual increases” in interest rates
  • Removed a sentence about “the risks to the economic outlook [being] roughly balanced”
  • Indicated that the Committee will be “patient” in determining future “adjustments” to interest rates given “muted inflation pressures”


Source: ForexLive

Possible Cuts?

Did you catch that subtle-but-significant shift? In addition to emphasizing its patience moving forward, the FOMC also changed from assuming further increases to interest rates to future adjustments, leaving the door open for potential interest-rate cuts – if the economy deteriorates in the coming months and quarters.

That’s the big shift that traders have glommed onto and it’s why we’ve seen a classic dovish reaction to the meeting in markets. Traders immediately bought bonds on the potential for lower interest rates, driving the yield curve down by 2-4bps across the curve. As a result, we’ve seen the gain a quick 40-60 pips against most of its major rivals, while US stock indices rallied to fresh 7-week highs. tacked on a quick 10 points to trade at $1325.

As Fed Chairman Jerome Powell delivered his post-meeting , he reinforced the statements dovish message. Crucially, he confirmed a Wall Street Journal report from last week by noting that the Fed is evaluating its balance-sheet plan and will be finalizing plans at the coming meetings. He also noted that the central bank’s portfolio will be normalized sooner and at a higher level than previously believed.

Essentially, the early interpretation is that the Fed has shifted from a bias toward hiking interest rates to a completely neutral and data-dependent outlook. This represents a major change in outlook from the central bank, and we wouldn’t be surprised to see ongoing weakness in the US dollar and continued strength in stock indices as traders digest the significance of this shift.

Cheers

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