Why the Fed may soon move in a dovish direction
|Although the coronavirus has spread to more countries and equities are now more than 7% down, the Fed has yet to move in a more dovish direction. On Tuesday, Fed vice chair Clarida may have opened the door slightly for a change in direction in the near future if the situation deteriorates further, as he said the Fed is looking at monetary policy on a meetingto- meeting basis. The question is how much will it take for the Fed to react? We compare the current situation with the Fed's U-turn in early June 2019 when Fed chair Powell said that the Fed will ‘act as appropriate to sustain the expansion' at the ‘Fed listens' event, which eventually led to the first insurance cut in July.
Our key takeaway is that looking at nearly all metrics, the economy is in worse shape than in June 2019 (see table below and charts next page). This means we should expect the Fed to shift soon in a more dovish direction and investors are right in pricing in cuts, in our view. The Fed's blackout period ahead of the 17-18 March meeting begins on 7 March and since none of the most important FOMC members (as of today) is scheduled to speak before, the dovish shift may not occur until the meeting (in the statement or at the press conference). Otherwise we believe a shift will occur after the March meeting, mirroring the radical U-turn the Fed made in early January 2019 after the hawkish meeting in December 2018 amid a longer risk-off period. Our base case is still a rate cut in April.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.