BNY Mellon: December FOMC: How Could a Dovish Hike be felt so Hawkishly?
BNY Mellon: December FOMC: How Could a Dovish Hike be felt so Hawkishly?
By John Velis, FX and Macro Strategist, Americas, BNY Mellon
By John Velis, FX and Macro Strategist, Americas, BNY Mellon
It was supposed to be a dovish hike.
The Federal Reserve raised rates as expected, but the new Summary of Economic Projections (the “dots”) reported a lower long-term (read: neutral) rate, and a less steep path for rate hikes in 2019 through 2021.
Chart 1: FOMC Summary of Economic Projections - Median Projection for Federal Funds Rate
The statement added a line in the middle paragraph promising that the Committee “will continue to monitor global economic and financial developments and assess their implications for the economic outlook.”
That’s the Fed saying: we’re a little concerned about what’s going on globally and in the markets.
So why did long-dated UST yields fall - flattening the curve - and why have all manner of risky assets – from the equity market to the EM currencies – take a beating in the hours after the meeting and associated press conference?
An adequate explanation - and thus a circumspect analysis of the implications of the December FOMC - probably centers on a combination of the risks to growth the Fed is now beginning to acknowledge, along with the fact that Chairman Powell sees no change in the pace of balance sheet tightening as quantitative easing is slowly being withdrawn.
Tightening liquidity and money supply - while the US and global economies are decelerating - is not really a cocktail that thirsty market participants wish to drink at the office holiday party.
Chart 2: FOMC Summary of Economic Projections - Median Projection for GDP Growth
That the Fed is recognizing the economy is not going to grow as fast as it thought just a few months ago shouldn’t surprise anyone. The outlook and the data have deteriorated this autumn (see our Annual Macroeconomic Outlook), and there is no sign that inflation is in danger of breaking out of the Fed’s comfort zone.
Thus, the path envisioned in September, which took rates well above and then back down to 3% is no longer appropriate