Fed less hawkish than expected

European stock indices shot higher on the open, playing catch-up after last night’s rally on Wall Street. Investors piled back into equities, bonds and precious metals while selling the dollar following the release of the Federal Reserve’s statement, Summary of Economic Projections and news that the central bank had hiked FED funds by 25 basis points. The interest rate increase was expected as Fed members have spent most of this month preparing the markets for tighter monetary policy. However, the statement and Summary (and in particular the FOMC’s “Dot Plot”) were less hawkish than anticipated. Recent statements from Fed members had led investors to believe that the central bank may be prepared to raise rates by 100 basis points over the course of 2017 - up from the 75 forecast back in December. However, there was no material change in the FOMC’s outlook for future rate hikes, inflation, unemployment or growth. Consequently, investors have had to quickly dial back on their rate hike assumptions for the rest of the year.

This is probably just as well, because while “soft” sentiment data has continued to pick up since Trump’s election victory in November, the hard data hasn’t. As an example, yesterday saw disappointing updates on CPI and Retail Sales. At the same time the Atlanta Fed is forecasting GDP growth of just 0.9% in the first quarter - hardly the ideal economic environment in which to tighten monetary policy.