Fed: Surprise on the dovish side - Westpac

Sean Callow, analyst at Westpac, points out that the rates markets have swung from pricing substantial further rate hikes into 2020 to roughly flat in 2019 and toying with lower rates in 2020 for the US Fed.

Key Quotes

“Markets were braced for a more dovish tone at this week’s FOMC meeting but the Fed still managed to surprise on the dovish side.”

“The Fed’s view on the economy hasn’t actually changed much, arguing that “the labor market has continued to strengthen and that economic activity has been rising at a solid rate.” But vitally, the FOMC dropped the long-held view that “some further gradual increases” in the funds rate were likely and surprisingly released a separate statement on its balance sheet.”

“At the Dec meeting, Powell said the plan was to “have the balance sheet run off on automatic pilot.” Now it is “is prepared to adjust any of the details” depending on economic and financial developments. This is a serious setback for the US dollar, producing sharp declines against a broad range of currencies.”

“Westpac still looks for the Fed to resume raising rates this year, given the tight jobs market and likely growth rebound in Q2. But near term, USD should remain on the back foot.”