Instant View: Steady Fed sees no more hikes in 2019

Le Fonti International – 19 Marzo 2019
March 20, 2019
Peter Cardillo of Spartan Capital Securities LLC speaks on Fed’s dovish turn; No 2019 hikes
March 22, 2019

Instant View: Steady Fed sees no more hikes in 2019

NEW YORK — The Federal Reserve held interest rates steady on Wednesday and its policymakers abandoned projections for further rate hikes this year as the U.S. central bank flagged an expected slowdown in the economy.

In a major shift in its perspective, the Fed also now expects to raise borrowing costs only once more through 2021, and no longer anticipates the need to guard against inflation with restrictive monetary policy.

Market reaction:

Stocks: The S&P 500 reversed losses to turn 0.3 percent higher. The Dow turned 0.1 percent higher. Bonds: The 10-year U.S. Treasury note yield fell to 2.5405 percent and the 2-year yield fell to 2.4003 percent.

Forex: The dollar index reversed slight gains and was off 0.63 percent.


Brian Jacobsen, senior investment strategist, Wells Fargo Asset Management, Milwaukee, Wisconsin

???I didn???t think they???d do it, but they came across as more dovish than what was expected. Wrapping up the balance sheet run-off by the end of September rather than the end of December was the biggest surprise. Beginning in October they will keep allowing the MBSs to run-off, but replace them with Treasuries. There was also more consensus on ‘no hikes for 2019’ than I thought there would be.

“While the ECB???s dovish tilt was taken as a bearish omen for the Eurozone economy, the Fed???s dovish tilt is viewed as much more bullish. The key difference was in the messaging. The ECB???s was couched in terms of weakness. The Fed???s is couched in terms of caution.???

Danielle Hale, chief economist,, Washington

???It???s no surprise that the Fed decided to hold rates steady today, given its January pledge of taking a patient approach to reviewing data and making interest rate decisions. But today???s meeting also gives us clues about the road ahead for mortgage rates, which are influenced by both short-term rates and the longer-term economic outlook. Despite current short term rate increases, recent economic forecasts have been less certain, which has caused mortgage rates to slip recently.

???With today???s downgrade of the forecast for 2019 and 2020 from the Fed and lowered expectations for the median Fed Funds rate in this time, we expect this trend to continue with steadiness or even further potential declines in mortgage rates. While a plus for home buyers, if concerns about the economic outlook rattle consumer and home buyer confidence, it could offset the benefit of lower mortgage rates.???

Mohamed El-Erian, chief economic adviser, Allianz, Newport Beach, California

???The Federal Reserve continued its move to a significantly more dovish policy stance, delivering to bullish investors exactly what they were hoping and betting for in terms of the outlook for interest rates and balance sheet.???

Doug Ramsey, chief investment officer, Leuthold Group, Minneapolis, Minnesota

???It sounded like to me as if I were listening to the (European Central Bank.) I had to read the Fed statement twice. It was a surprise. I think we are on the cusp of that ??? Does the Fed know something we don???t? What I found most interesting is more of the change in tone than substance by the Fed at this point. We are cautious on the stock market and moderately bullish on the bond market. We continue to forecast an economic slowdown. I wouldn???t be surprised to see a rate cut later this year ??? around the fourth quarter. And I wouldn???t necessarily take that as a bullish thing.??? ??

Peter Cardillo, chief market economist, Spartan Capital Securities, New York

“It’s very dovish, obviously. They talked about the balance sheet (reductions)??? and it does appear now they have abandoned raising rates for the remainder of the year. But that came also with lower economic activity, not by much, but they lowered some of their forecasts. Basically, this should be positive for stocks and hard assets as well.

“If rates go down, it’s less of a headwind for stocks. It doesn’t mean we’ll turn into a super bull market.”

Andre Bakhos, managing director, New Vines Capital LLC, Bernardsville, New Jersey

“The markets are viewing the fact that there will be no more rate hikes this year positively and it creates a risk-on scenario and if we can get a trade deal done in this stabilizing environment it could set up very nicely down the line.

“The markets have rallied very strongly on the news and that type of strong move is indicative of a sigh of relief and what one would deem as the best case scenario. In other words, a slowing economy is good as it keeps rates low, it shows that we can have growth even though the economy is slowing down and that helps markets.”

“This is going to create a good trading environment, and net-on-net this is a sigh of relief for traders and something the markets could focus on in the nearer term while we wait for a better visibility in China.”

Leslie Falconio, senior strategist, UBS Global Wealth Management’s Chief Investment Office, New York

“We anticipated the Fed removing one dot in 2019 and leaving one dot. They’ve removed both hikes in 2019. They’ve removed two??hikes in 2020, leaving only one hike. That’s a bit dovish which is pushing yields down.

“They came out a bit more dovish than what the market was anticipating and what we were anticipating. The yield curve is therefore steepening. The long end is underperforming a little in Treasuries. When it comes to the balance sheet, although we were anticipating for the balance sheet (runoff) to cease we needed confirmation for exactly when they’d do that.”

“The market had already priced that the fed wouldn’t raise this year. That’s why you’re not getting as big a move. The market was right. It was pricing out two hikes this year and from what the Fed gave us the market was correct.”

Luke Tilley, chief economist, Wilmington Trust, Wilmington, Delaware

???The Fed moved in a much more dovish direction than anticipated on the rate hikes. That should be pretty supportive to the market. The action on the balance sheet is also supportive of markets.???

???We are not concerned that the Fed has downgraded its GDP forecast. Our forecast has been about 2 percent growth for 2019 for quite some time, so the Fed is coming down closer to our expectation. The dovishness on rates is less about anticipated growth and more about the fact that we simply don???t have any signs of inflation picking up.???

Chuck tomes, associate portfolio manager, Manulife Asset Management, Boston

“Overall it seems the Fed was able to solidify their dovish view as there are no rate hikes priced in for this year and only one rate hike for 2020. That was more dovish than people were expecting at the margin, even though the market was looking for a dovish Fed today.

“The dollar has come under pressure against a large number of currencies around the world.”??????

Josh Bivens, director of research, the Economic Policy Institute, Washington, D.C.

???This is a welcome pause from the too-regular increases of the past couple of years. It is also a pause warranted by the economic data. There are clear signs that past rate increases are slowing spending growth through traditional transmission channels – slower residential investment growth and lower net exports – and 2019 will see the fiscal boost from tax cuts and higher spending levels fade rapidly. While wage growth is clearly healthier in recent years, productivity has also staged what looks increasingly like a durable, if unspectacular, rebound. This productivity rebound has helped keep price inflation firmly within – or even under – the Fed???s long-run targets. At this point, the key challenge facing the Fed in coming years is likely not going to be how to keep inflation in check, instead it will be how to keep the recovery going as long as possible to let workers finally eke out some significant gains. Indications that the Fed is unlikely to raise rates this year??suggest??they realize this.?????

Gennadiy Goldberg, interest rate strategist, TD Securities, New York

???It???s fairly dovish I???d say, given that there were 11 dots going to zero hikes in 2019, which is certainly quite a move lower. The fact that they???ve announced balance sheet runoff ending I think is certainly quite dovish as well. In a sense I think this is quite a bit more dovish than the market was priced for and that???s why you???re seeing Treasuries rally and equities rally as well. I think the expectation in the markets was a lowering to one dot. I think that was really the consensus and the fact that we???ve had 11 at zero, so effectively no hikes this year, sends a pretty dovish signal to the market.???

Joe Manimbo, senior market analyst, Western Union Business Solutions, Washington

???The Fed exceeded markets’ dovish expectations which took a toll on the greenback. The Fed did a big about-face on policy. The fact that the Fed threw in the towel on a 2019 rate hike was particularly dovish. Still, with the Fed erring more on supporting growth, it could reduce the chance of a rate cut in the months ahead. As for the timing on the end of balance sheet normalization, September is the early side of expectations.???

Evan Brown, head of macro asset allocation strategy, UBS Asset Management, New York

“It definitely skewed on the dovish side of expectations. The main surprise is that the Fed projects zero hikes in 2019. Whereas our broad expectation, and the expectation of consensus, was for them to leave in at least one hike in 2019. So, they???re effectively saying they???re done for the year.

“There???s one hike projected for 2020 but there???s a long time between now and then and so the market is effectively taking the view that the Fed is done tightening. ??

“The balance sheet rolloff information is coming in in line with expectations. The main surprise is having no hikes in 2019 for the median dot projection – and there was a surprisingly high number of FOMC members who were in favor of that.”

Walter Todd, chief investment officer, Greenwood Capital, Greenwood, South Carolina

???The market had already priced in no hikes for 2019, but the Fed kind of validated that with the dots. That???s somewhat significant. The clarification on when they are going to end the balance sheet, maybe that was sooner than people anticipated, end of September. That???s the two things that the market is maybe reacting to at this point.???

(Americas Economics and Markets Desk; +1-646 223-6300)