Sean Callow, Research Analyst at Westpac, points out that three months ago, the FOMC met, with markets fully priced for a rate hike and markets also expected the Fed to boost its GDP forecasts and some economists were tipping the median projection for the fed funds rate for 2018 to be raised from 3 to 4.
“As it turned out, the FOMC did of course raise rates 25bp, boosted its 2018 GDP forecast but left the median 2018 projection at 3 hikes. Yields fell and the dollar sold off.”
“This sounds familiar. This week the FOMC raised the funds rate to 1.501.75%, pushed up its GDP forecast to 2.7% for this year (from 2.5%) but the median funds rate projection remained at 2.1%. US yields and the dollar fell in response, amplified by Chairman Powell’s observation in the press conference that there was “no sense” in the data that the US was on the cusp of an acceleration in inflation.”
“However, there was some hope for the hawks beyond the headlines. December’s 2 dovish dissents were not repeated as the doves rotated off. More substantively, the “dots” representing all FOMC members did actually move in a hawkish direction, just not quite enough to move the 2018 median. In Dec, 6 members were below the end-2018 median projection of 2.125%, but in Mar there were only 2. In short, 6 members opted for 4 hikes this year, while 6 chose 3.”
“Moreover, this meeting produced a higher median for 2019, implying a further 125 basis point increase in rates by end2019. There is no other major central bank planning anything like this degree of tightening. This longer term outlook is key to our Economics team’s forecasts of underlying USD appreciation against major currencies, including our 0.74 end-2018 target on AUD/USD.”
“But short term, the FOMC meeting was a setback for the dollar, where sentiment has been decidedly mixed in recent months. Gaping budget and trade deficits and President Trump’s switch from tax cuts to trade wars are unnerving many investors.”