Fed as dovish it could be without cutting rates already

Key takeaways

• As growth has moderated, inflation expectations have fallen and uncertainties have increased, the Fed now says it "will act as appropriate to sustain the expansion".

• We stick to our view that the Fed will cut rates in July by 25bp and deliver a total of 75bp of rate cuts in the second half of 2019 (July, September and December). The trade war is an important risk to our outlook in both directions.

• After two days of dovish central banks, we still see a strong case for a higher EUR/USD and lower USD/JPY as the Fed is set to ease more than other central banks (see overleaf).

Several important dovish changes to the FOMC statement

Overall, the Fed was as dovish as it could be without cutting rates at its meeting. In line with our view, there were several important dovish changes to the statement. Most importantly, the Fed removed the wording that it was "patient" and now said, "the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion", which we believe, as outlined in our preview, is a strong easing signal. To the dovish side was also that the committee was divided on whether to signal cuts outright this year or not (see chart to the right). The Fed also lowered its longer-run dot (the Fed's estimate of the neutral rate, where monetary policy is neither easy nor tight), which means the current monetary policy stance is tighter than it thought three months ago (see chart below).

In the statement, the Fed also recognised that economic growth is now "moderate" (versus "solid" in May), that market-based inflation expectations have "declined" and that "uncertainties" to the outlook "have increased" (which is a new element to the statement). The latter is mostly, but not only, a reference to the ongoing trade war with China.

Download The Full FOMC Review