Dovish Fed Doesn't Guarantee New Bull Market

Dwayne Harmon
March 22, 2019

The Fed pointed out that inflation for items other than food and energy remains near 2 percent, its target level. It says traders now put the probability of any Fed rate hike this year at zero and project a one-in-four chance that the Fed will actually cut rates by year's end to help prevent a slowing economy from toppling into a recession.

The Fed also indicated it would begin slowing its policy of reducing its holdings of US government-issued debt securities in May 2019 and stop reducing its quantitative tightening policy altogether in September 2019. The two-year yield, which reflects investor expectations about interest rate hikes on Wednesday fell 6.9 basis points but was last up 1.2 basis points at 2.413 per cent. In doing so, the Fed joined the other major central banks in raising concerns over a global economic slowdown.

Federal Reserve chairman Jerome Powell repeated his promise to be patient on rate rises.

"Patient means that we see no need to rush to judgment", Powell said.

Stocks got a brief bump from news that the Federal Reserve doesn't plan to raise rates this year, but still ended mostly lower after those gains faded. In regard to its balance sheet, the Fed said it would slow its decreases of the asset portfolio and end runoff of Treasury holdings in September, according to the Wall Street Journal.

The British currency tumbled 0.73 percent against the USA dollar on a rising probability of a "no-deal" Brexit that would likely slow economic growth.

"I think we are bracing for another shoe to drop", said Scott Anderson, chief economist at Bank of the West in San Francisco.

Powell, for his part, has resisted criticizing the president and has repeatedly asserted the Fed's independence from the Trump administration.

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Growth in Europe and China has weakened and there are conflicting signs about how the USA economy is doing. Powell is expected to note that while the US economy is on firm footing, it faces risks from slowing growth and trade conflicts.

The Fed also said that is will slow the monthly reduction of US Treasury bonds it holds from $30bn to $15bn from May onwards ending in September.

Benchmark U.S. 10-year notes last fell 1/32 in price to yield 2.5387 percent, from 2.537 percent late on Wednesday. Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups. The exact mix will matter a great deal down the road, given that the Fed opted this week to sacrifice policy flexibility for 2019 in favor of giving bullish investors exactly what they desired.

Fed officials are now expecting the economy to cool down more than previous projections. The real action centred in the bond market, where prices rose sharply, pulling Treasury yields down to the lowest levels they've seen in more than a year.

Inflation for the year is now seen at 1.8 percent, compared to the December forecast of 1.9 percent.

The Federal Reserve says US growth has slowed from the "solid" rate seen back in the fourth quarter of 2018 and this can be expected to lead to an easing of inflation over the coming months, which means the bank is under less pressure to raise its interest rate.

Economists expect the Fed's updated forecasts to downgrade its estimate of growth in light of a slowdown in manufacturing and retail, sluggish housing and construction activity and global pressures, including an ongoing trade war.

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