March 19, 2015

Fed won't be impatient - March 2015 FOMC Statement
The FOMC dropped the word patient from its March FOMC statement, but continued to maintain dovish language

by iFAST Research Team

 RBI Policy Note- Jan15

Key Highlights from the latest Fed Meeting:

  • Fed starts to worry a bit about growth. The FOMC assessed that economic growth has “moderated somewhat”, suggesting that the Fed continues to worry about growth momentum, which could entail a continued dovish stance on monetary policy
  • Growth rates revised lower since December. 2015 GDP growth was revised down to 2.3-2.7%, down from 2.6-3% in December. 2016 and 2017 growth figures were cut while the Fed also lowered its inflationary forecasts for both 2015 and 2016 (Core PCE inflationary forecasts for 2017 were held at December’s numbers, at 1.8-2%)
  • Strong USD worrying the Fed? The Fed also highlighted a weakening of export growth; this could be interpreted as USD strength becoming a bit of a problem for the US economy, and while this is not an explicit target for the FOMC, the ongoing strength of the USD may be an implicit input in the consideration of the timing of rate hikes
  • Near term inflation remains benign. Inflation was also assessed and forecasted “to remain near its recent low level in the near term”; again, this entails a continued dovish stance from the Fed
  • No longer patient, but still very dovish. Much has been made about the FOMC’s use of the word “patient” in deciding when to normalise its monetary policy stance – the word was dropped in the latest FOMC statement, although the FOMC guided that “an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting”, while also reiterating the need to see labour market improvements and to be “reasonably confident that inflation will move back to its 2 percent objective over the medium term”; all this continues to represent very dovish language used by the Fed

Fed continues to err on the side of caution

The latest FOMC statement and forecasts points to a rather dovish Fed, with Fed Fund futures now suggesting just a 10% probability of a rate hike in June, with expectations of the start of the rate hike cycle now pushed out to October (where futures are pricing in just a 61% probability of a rate hike). We previously suggested that the Fed will likely err on the side of caution and tend towards accommodative policy rather than a premature tightening, and the latest guidance from the Fed remains aligned with our view that rates are likely to stay lower for longer, given the muted inflationary pressure alongside weakness in global growth (outside of the US) – investors should note that the majority of global central banks have actually cut rates in 2015, rather than hiked them, representing a move towards more pro-growth policy.

Market reaction

While headline news focused on the rebound in US stocks following the announcement of the March 2015 FOMC statement (the S&P 500 recovered from a -0.6% intraday loss to end 1.2% higher at the end of the trading session), we note that the USD posted significant weakness, with the Dollar Index falling about -1.8% after the Fed’s announcement, possibly on the expectation that rate hikes will be pushed out further down the road. Bond yields also fell on the weaker inflationary outlook, with the US 10-year Treasury yield declining more than 16bps intraday following the Fed’s announcement; the 10-year yield now stands at 1.91%, down from the 2.07% at the close of the 16th of March.

While riskier assets are expected to benefit from the improved sentiment following the Fed’s dovish FOMC statement release, investors should be mindful of valuations in the various asset classes – interest rate normalisation is still on the cards (albeit pushed further down the road) which will have implications for the valuations of various asset classes. Those who are betting on further strengthening of the USD may also wish to exercise some caution, given that currency considerations are also likely to weigh on the Fed’s mind as it embarks on its path of monetary policy normalisation. 


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