Fed: Markets feeling a little bit underwhelmed – Deutsche Bank

According to analysts at Deutsche Bank, markets were left feeling a little bit underwhelmed after the latest Fed meeting, given that Treasury yields closed well off their highs and the Greenback tumbled by the most in nearly two months.

Key Quotes

“It feels like that was perhaps just reflective of what were elevated hawkish expectations going into it as the message for us was one that while economic data for now is not necessarily strong enough to justify a faster hiking cycle this year, the Fed does appear to be a lot more upbeat further down the line.”

“Indeed, that was reflected initially in the statement with the addition of the line “the economic outlook has strengthened in recent months”. The hotly anticipated dot plot projections revealed that the median for 2018 was left at a total of three rate hikes, however only just as it would have only taken one more voter below the median to have moved higher in order to shift the median to four. Further out, the median for 2019 is now at 2.9% which implies three rate hikes, an increase of one from December, while the 2020 median is now at 3.4% which is up from 3.1% in December.”

“Meanwhile the stronger outlook was reflected in the more optimistic median projections for growth, unemployment and inflation. Indeed, GDP has been revised up by two-tenths this year to 2.7% and by three-tenths in 2019 to 2.4% while unemployment was revised down one-tenth this year to 3.8% and down three-tenths next year to 3.6%. As for inflation, the median committee member still expects core inflation this year of 1.9% which was perhaps a small surprise given the data so far, however median readings for 2019 and 2020 were both lifted to 2.1% and a tenth more than previously expected. That’s interesting as it also implies that the Fed is willing to accept a slight overshoot which is something that Evans has emphasized with regards to the symmetry of the 2% target.”

“As for new Fed Chair Jerome Powell, well in golfing terms it felt like he struck it straight down the middle of the fairway. That’s to say that he largely gave away an impression of one of continuity under his new role as Chair, and an emphasis still on the Fed sticking with its gradual approach to tightening. In other words, he didn’t appear like he was willing to deviate off the well beaten path and into the rough. Indeed, his tone was fairly balanced while he sought to down play the importance of the median dot plots as well as adding “there is no sense in the data that we’re on the cusp of an acceleration in inflation”.”

“Overall, DB’s Peter Hooper noted that the FOMC statement and Powell’s inaugural press conference were close to his expectations, marking a shift in a hawkish direction relative to December, although perhaps slightly less so than he had anticipated given recent Fed rhetoric. More specifically, he thought Powell’s debut performance was strong and highlighted that the Committee is likely going to need to see evidence that wage and price inflation are picking up meaningfully before becoming concerned about significant overheating associated with the tightening labour market.”