FED RESERVE GOES DOVISH, VERY DOVISH!

about 5 months ago
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It’s really confusing; a couple of months ago, the talk was about rate hikes in the USA – how many was the question then. Nothing really dramatic has changed for the economy, yet the talk has now turned around to no rate hikes at all.  Fed Chairman, Jerome Powell said in the ensuing Press Conference, “We see a favorable outlook for this year,", adding "the data are currently not sending a signal that we need to move in one direction or another" on interest rates. Yet, Powell said, the Fed as concerned about the risks to this outlook, mainly w.r.t trade talks and Brexit.

It was a foregone conclusion that the Federal Reserve at tonight’s meet was going to maintain a status quo as far as the interest rates were concerned. The only thing which needed to be watched was its indication for the year – would there be any rate hikes at all this year?

Well, looking at the dovish language of the Fed throughout, most analysts are of the opinion that 2019 will see not rate hikes; it would be other fiscal adjustments but no rate hikes. And in 2020, as of now, the “dot plot” indicates one only. In fact majority analysts see the Fed hiking rates only one more time in the next three years.

Last year, which was just three months ago, saw the Fed hiking rates four times, wherein the fourth rate hike was in Dec. At that Dec Fed meet, most analysts had penciled in one to three rates hikes for 2019. From worries of an overheated economy, today there is concern of a slowdown and that alone has signaled this change. Clearly, there is a widening chasm in the economic optimism between the Fed and the bullish forecasts from th White House regarding the US economy.

The Fed said in the meeting post the statement that the, “growth of economic activity has slowed from its solid rate in the fourth quarter.”  Reasons cited - slowdowns in household spending and business fixed investment, expecting economic growth of 2.1% for 2019, down from earlier forecast of 2.3% in Dec.

The White House, on the other hand, expects growth to be strong at 3.2% in 2019 and 3% in 2020. As we said, the chasm between the Fed and the White House has never been this wide.

There was clarity on the tapering of the balance sheet – it said that starting May, it would slow the pace of runoff of its $4 trillion asset portfolio and end the runoff of its Treasury holdings at the end of September, exactly two years after it began unwinding its crisis-era stimulus programs.

Highlights of Fed statement:

  • Held its benchmark interest rate steady 
  • Majority of officials signaled they might not raise the rate at all this year.
  • In May it would slow the pace of runoff of its $4 trillion asset portfolio and end the runoff of its Treasury holdings at the end of September.
  • Fed repeated its prior stance that it “will be patient” in determining future changes in rates.

For the Indian markets, this will be good news when trading begins on Friday after the Holi break on Thursday. Not because it changes anything directly but mainly because more FPI money could come into the market. Yields on US bonds have fallen and this in turn increases the attractiveness of emerging-market currencies. Thus rupee could remain stronger and this bodes well.

PS: Happy 'Holi'day to all!!

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