Following the Fed’s announcement, please see below for market views from the Global Fixed Income, Currency & Commodities Team (GFICC):
Consistent with our and the market’s expectations, the Federal Open Market Committee (FOMC) maintained the Fed Funds rate target range of 2.25% ‐ 2.50%. The FOMC also provided the quarterly Summary of Economic Projections, which by nearly every account was significantly more dovish than we or the market had been anticipating. Based on the totality of the day, it has become clear that the reaction function of the Fed has changed in conjunction with a softer growth and inflation forecast.
The March FOMC statement contained changes to the current economic assessment in order to reflect the moderation in the data trend following the government shutdown. Given the volatility in recent data releases and the continued uncertainty regarding the global trade and growth backdrop, the Committee continues to exclude a formal balance of risks from the statement. On the outlook, the language regarding patience before adjusting policy remained unchanged. In a separate release, the FOMC outlined the end of balance sheet normalization.
We can break the statement into two parts:
There were no dissenters.
There was an additional documentation on the balance sheet:
Summary of Economic Projections
Within the projections, the growth and employment forecasts were downgraded. Growth is expected to be 2.1% in 2019 vs a forecast of 2.3% at the December meeting. Growth was also downgraded in the out years. The unemployment rate is forecast to decline to 3.7% in 2019 vs a forecast of 3.5% at the December meeting. The unemployment rate forecast was also increased in the out years. Core PCE inflation is still projected to rise to 2% in 2019 and maintain that level in the out years.
The median dot for 2019 shifted from signaling 2 rate hikes to signaling no rate increases. The 2020 dot now shows 1 additional rate hike, which would bring the Fed Funds rate to 2.625%. No rate hikes were projected in 2021.The long-run dot was unchanged at 2.75%.
Chair’s Press Conference
Chair Powell highlighted the moderation in consumption and investment growth data in the first few months of 2019, but remained upbeat on the US economy despite the change in the policy stance. The Chair mentioned the Committee’s primary objective was to extend the cycle and encourage labor force growth thus they would remain patient especially in light of political uncertainties and muted price inflation pressure. The Chair and the Committee remain comfortable with the current stance of policy (which they broadly view as neutral) given that inflation expectations remain low. The Chair went to great lengths to say that the economy was in a good place and was less concerned about financial stability risks than they had been in the past even in light of a less aggressive monetary policy stance.