‘Even more dovish than the market expected’ – Good summary quote of the FOMC’s March meeting, which in itself is interesting considering the market has been considerably bearish on the outlook of the global growth story over the past 6 months.
Bring it back to a USD perspective: we have been expecting a moderation in the USD in 2019 after a stellar 2018. Now, in some crosses, this has indeed been the case i.e. GBP. However, DXY (the USD Basket) as be rather resilient to this moderate as the likes of the EUR face headwinds of their own due to domestic and international economics.
So, has the Fed finally caused the forecasted moderation in the USD on the back of the March meeting?
In the short term yes, medium term unlikely, here is why:
– Dot Plots: moved to ‘No Move’ in 2019 with 1 hike in 2020 which would take the Fed funds rate to 2.5% in the next 21 months. No hikes are expected in 2021 meaning sometime in 2022 or beyond another rate rise is needed to reach the median estimate of the neutral rate which remained at 2.75%. The sharp change to the dots explains the fast and sharp decline in the USD and the steepened US yield curve post the press conference. The market actually believes the next movement in the Fed funds rate is actually a cut. All this is a clear a USD moderator.
– Balance sheet runoff: As foreshadowed by the Board the balance sheet run-off will conclude come September with a reduction in the current speed starting in May. When all is said and done the Fed’s balance sheet will stand at 17% of US GDP or US$3.7 trillion, significantly higher than originally wished. This will release the pressure building in fixed income and the overall financial ‘tightness’ that has been felt in lending. Again, one could argue a USD moderate on this point.
However, its Powell’s testimony that points to why the sharp USD declines are unlikely to last over the year.
– He is clearly not concerned about the domestic growth outlook; noting the weak December retail sales read was “inconsistent with a significant amount of other
data.” i.e. wealth effect, employment, wage growth and corporate earnings.
– Notes some downside risks to inflation, which the Fed is using as its justification for its back down around its rate hike case. Powell stated that “some indicators of
longer-term inflation expectations remain at the low end of their ranges in recent years,” and followed that up with “feel that we have [not] convincingly achieved our
2% mandate in a symmetrical way.”
– His synopsis of all of this is the current policy rate as already “in the range of neutral”, that it was “a great time for us to be patient” and reiterate twice that the
policy rate is “in a good place’.
The conclusion from all of this is the Fed is more concerned about the impacts of the global growth slowdown on the US economy rather than the domestic economy itself. Europe, China and Japan are slowing, and this would suggest the EUR, JPY and EM currencies are going to slide as traders shed risk and head to stronger currency economies, namely the US.
Yes, this will irk the President and to some extent the Fed too, but as 2019 drifts on the current declines in the USD are likely to tempter as the crosses see higher economic risks.