The Fed seemed to back away from its three-hikes-plan in today's FOMC statement, as FF futures and the USD signalled a more dovish stance,
But Wall Street analysts remain confused...
The FOMC kept policy rates unchanged today and made few revisions to its statement. We see limited implications for the near-term policy outlook, and continue to assign a 35% chance that the committee raises rates as soon as the March 14-15 meeting. Our modal forecast remains three hikes this year, at the June, September and December FOMC meetings.
“For traders, the biggest mystery was whether Dr. Yellen and company were leaning toward raising interest rates in March or closer to June, and at the margin, it seems as if the Fed is leaning more toward the latter. Whereas many observers expected that the central bank would upgrade its assessment of the inflation picture, the FOMC reiterated that “market-based measures of inflation compensation remain low” and that “survey-based measures of longer-term inflation expectations are little changed.”
The world has turned upside down with Donald Trump storming into Washington and the Fed does nothing. Fed officials are in the Team Trump (administration) crosshairs, and seem frozen in time like a frightened deer in the headlights. Is this it? This is what they are giving us? Consumer and business sentiment has improved of late. Throw the dog a bone? Are you kidding? Consumer confidence is back to a high normal altitude. Rates are too low for this economy; economic cycle is almost over with expansion turning 9 years old in July, yet Fed policy has barely gotten out of the gate. Fed has left rates near zero for so long that it’s putting the institution at risk from those who want to rewrite its mandate and governance; failure to act may have emboldened its critics in Congress. Would not be so bad if Fed meeting that just ended left door open for a possible March hike. Policy makers think they have all the time in the world; we think time is running out, judging from Congress and new administration.
Very dovish Fed by composition and the difference is clear in the statement. Gone are George and Mester.. this is a unified dovish Fed.
“Nothing in the statement either further opened or closed the door to a tightening move on March 15. If that is to occur, it will most certainly have been well flagged by Fed-speak in the interim. Our view remains that June is a more likely time for the move than March, but a reasonable case for March could certainly be made if economic data continue to come in on the stronger side.”
“If the Fed does intend to raise rates three times this year as their December dot diagram suggested, then they are making it difficult for themselves by not opening the door to a March hike. The only substantive change to the FOMC statement text was ‘Measures of consumer and business sentiment have improved of late. Inflation increased in recent quarters but is still below the Committee’s 2 percent longer-run objective’.
There is little reference to the fact that inflation is now knocking at the door of their longer run objective, or that wages growth now appears to have taken off. With further strength in the labour market and inflation likely to be evident before the March meeting, and the likelihood that the Fed’s longer run inflation objectives will not only be met but possibly surpassed by then, we feel that the Fed has missed a trick today in not nudging markets in the direction of a March hike. And if they do not move then, it will appear to some market participants that the Fed is falling behind the curve.”
“I expect the minutes to be released in a few weeks will show a more wide ranging debate than that indicated by the policy statement but the clear lack of visibility on key trade, tax, spending and regulatory initiatives argued for a well-scrubbed statement. The risk was one-sided going into the release and after the stronger than expected ADAP and ISM reports this morning, the bond market is likely to sell off into Friday’s payroll report. I would not be surprised if the 10-year is well above 2.5 per cent by Friday and the 2-year is closer to 1.3% than to current levels before the jobs data is reported.”