Global Daily – FOMC doves on the backfoot

by: Bill Diviney , Georgette Boele

Fed View: Powell balanced, but doves fold

The FOMC today raised the target range for the federal funds rate by 25bp to 1.50-1.75%, as was widely expected. More importantly for markets, the Summary of Economic Projections (SEP) showed the median projection for the fed funds rate shifting from 2.7% to 2.9% in 2019, but unchanged at 2.1% for 2018 (albeit on the borderline) – as we had predicted in our preview on Monday (see here). Alongside centrist committee members moving from three to four hikes, however, an unexpected change was the shift in the more moderate doves in the committee from projecting 1-2 hikes in 2018 to projecting three hikes. Median GDP growth forecasts were revised up, by 0.2pp for 2018 to 2.7%, and by 0.3pp for 2019 to 2.4% (ABN AMRO: 3.0% and 2.7% respectively), somewhat more modest than would have been expected, likely reflecting uncertainty on the committee over the degree to which tax reform will stimulate investment.

Chair Powell struck an overall cautious and balanced tone in his first press conference, though he leaned somewhat dovish at times, likely to counter the hawkish tone from the SEP update. Most notable was his dovish characterization of inflation, on which he said there was as yet “no sense in the data that we are on the cusp of an acceleration,” despite labour market tightness – and pointing explicitly to the flat Phillips curve as the reason for this. On the economic outlook, while noting that stimulative fiscal policy was a tailwind, when asked he also acknowledged that business contacts of some committee members had expressed concerns over trade policy, though understandably he erred cautiously when discussing this topic. Finally, when asked about increasing the frequency of press conferences, he admitted that while actively considering such a change in the name of increasing transparency, that he was concerned that the market would take this as a signal for the future policy path. This suggest to us that were the Fed to make such a change in future – which is looking increasingly likely – that it would seek to clearly counter the notion that this has any policy implications.

All told, while Chair Powell struck a balanced tone, the FOMC overall has moved in a more hawkish direction, consistent with the stronger growth outlook. We continue to expect three hikes from the Fed in 2018, but see risks of a fourth hike should hourly earnings growth accelerate towards the pre-crisis highs of c.3.5%. (Bill Diviney)

FX View

Initially the dollar strengthened and yields rose as the path of rate increases for 2019 and 2020 is now steeper. But a combination of the median FOMC projection still for 3 rate hikes this year, and Chair Powell’s balanced tone, resulted in downward pressure on the US dollar and rates. Financial markets had anticipated a change in the dot plot to four 25bp rate hikes this year, and the market moves likely reflect some disappointment that the median did not shift. (Georgette Boele)