Fed completes its dovish shift – ABN AMRO

Bill Diviney, senior economist at ABN AMRO, explains that the FOMC surprised to the dovish side yesterday by signalling no rate hikes in 2019, and announcing an end to its balance sheet runoff this September

Key Quotes

“While the move supports our view that the Fed is done with rate hikes this cycle, the removal of both 2019 hikes came as a surprise to us. With today’s dot plot, the Fed just about retains its tightening bias, but only by a whisker – with one 2020 rate hike, and policy on hold in 2019.”

“In the press conference, Chair Powell continued to sound rather dovish, again referencing the global slowdown (particularly in China and Europe), but also noting the ‘mixed’ incoming data the US is seeing in 2019 so far. Indeed, the FOMC once again downgraded its 2019 growth forecast to 2.1% from 2.3% in December, bringing its view closer to our own expectation of 2.0% (Q4/Q4 year-on-year rates; our annual average growth forecast is 2.3%).”

“Despite the dovish moves today by the Fed, we continue to view rate cuts as unlikely in our forecast horizon (to end 2020). Following the decision, however, market pricing moved further in the direction of rate cuts, with 9bp in cuts now priced in by year-end, up from 6bp previously. As such, there is scope for a repricing given the Fed’s dovish shift is now likely complete.”