FOMC Delivers "Dovish Hike", Lays Out Plans For Balance-Sheet Unwind

In the most well-telegraphed, 'never in doubt, no matter how bad the economic data is' FOMC Statement ever, The Fed hiked rates by 25bps and maintained its rate-hike trajectory forecast, shrugging off the collapse in economic data (including weak inflation). The market was anticipating a so-called 'dovish hike' and The Fed delivered by saying it is "monitoring inflation developments closely" and also offered more detailed plans of the balance sheet unwind (beginning this year).

Interesting hedgeing against the chance of a "no rate hike" was "aggressive" today in Fed Funds Futures.

Here are the headlines.

  • *FED RAISES RATES, MAINTAINS FORECAST FOR ONE MORE HIKE IN 2017
  • *FED SAYS IT'S `MONITORING INFLATION DEVELOPMENTS CLOSELY'
  • *FED SAYS KASHKARI DISSENTS IN FAVOR OF KEEPING RATES ON HOLD
  • *FED SAYS IT EXPECTS TO START SHRINKING BALANCE SHEET THIS YEAR
  • *FED MAINTAINS BALANCE SHEET REINVESTMENT, LAYS OUT UNWIND PLAN

And the highlights, courtesy of Bloomberg:

  • RATES: Target range for fed funds rate was raised to 1%-1.25% from 0.75%-1%; decision included dissent from Minneapolis Fed’s Neel Kashkari; rate increase is third hike since December 2016
  • RATE OUTLOOK: Keeps reference to gradual pace of future rate increases, continues to say fed funds rates is likely to remain below expected long-run levels “for some time” and actual path of rate will depend on outlook
  • INFLATION: Says inflation on 12-month basis will stabilize around 2% over medium term, but is expected to stay somewhat below 2% in near term; said inflation excluding energy and food is running somewhat below 2%; Still says that FOMC will monitor inflation developments relative to its “symmetric goal”
  • ECONOMY: Fed now says economic activity has been rising moderately this year vs prior assessment that it has slowed; continues to say U.S. labor market has continued to strengthen and now calls solid job gains as having “moderated”
  • REINVESTMENT POLICY: Fed deletes prior language that said it will keep existing reinvestment policy in place until normalization of fed funds rate “is well under way”; also removes reference to FOMC’s holdings of longer-term securities staying “at sizable levels”
  • RISKS: Near-term risks to outlook still appear “roughly balanced” as FOMC monitors inflation developments “closely”

Key highlights from the Fed's forecast, first the change in dots, which dipped on the long-end:

  • 2017 1.375% (range 1.125% to 1.625%); prior 1.375%
  • 2018 2.125% (range 1.125% to 3.125%); prior 2.125%
  • 2019 2.938% (range 1.125% to 4.125%); prior 3.000%

On inflation: the key lines:

  • "Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee's 2 percent objective over the medium term."
  • "Near term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely."


The FOMC's inflation forecast dropped by 0.2%:

  • Median 2017 core pce inflation 1.7% vs 1.9% march est.
  • Median 2017 core pce inflation 1.7% vs 1.9% march est.

On the Fed Funds rate:

  • Median federal funds est. 1.4% end-2017, unch vs march
  • Median federal funds est. 2.1% end-2018, unch vs march
  • Median federal funds est. 2.9% end-2019 vs 3% in march

The other forecasts:

  • Longer-run median unemployment rate 4.6% compares to previous forecast of 4.7% at March 15, 2017 meeting
    • 2017 median jobless rate at 4.3% vs 4.5%
    • 2018 median jobless rate at 4.2% vs 4.5%
    • 2019 median jobless rate at 4.2% vs 4.5%
  • Longer-run real GDP median projection of 1.8% compares to previous forecast of 1.8%
    • 2017 median GDP growth 2.2% vs 2.1%
    • 2018 median GDP growth 2.1% vs 2.1%
    • 2019 median GDP growth 1.9% vs 1.9%
  • Longer run PCE inflation median at 2.0% compares to previous forecast of 2.0%
    • 2017 median PCE inflation 1.6% vs 1.9%
    • 2018 median PCE inflation 2.0% vs 2.0%
    • 2019 median PCE inflation 2.0% vs 2.0%
    • 2017 median core PCE inflation 1.7% vs 1.9%
    • 2018 median core PCE inflation 2.0% vs 2.0%
    • 2019 median core PCE inflation 2.0% vs 2.0%

Some other observations:

  • Fed says it’s ‘monitoring inflation developments closely’
  • Fed raises target range for federal funds rate to 1%-1.25%
  • Fed: labor mkt continued to strengthen, job gains moderated
  • Fed: economic activity rising moderately, spending picked up
  • Fed says balance-sheet rolloff caps would start at $10b/month

*  *  *

Here is Neil Dutta of Renaissance Macro explaining what he think is the highlight:

The main development in the statement is that they are “monitoring inflation developments closely” in the second paragraph. In our view, this means they are not going to follow through on hikes if core inflation continues to disappoint.

* * *

Meanwhile, the fallacy of Fed data-dependence is exposed...

And the yield curve has collapsed in policy-error-style...

As of last night, the market was pricing 1.48 rate hikes in 2017 (including today), heading into the print, it was anticipating just 1.28 rate hikes (including today) following the dismal data this morning...

*  *  *

Full FOMC Statement redline below...