- The Fed decision is dovish in quite a few ways.
- The US Dollar plunged, and the move may not be over.
The Federal Reserve made five dovish changes that sent the US Dollar down:
1) No hikes in 2019: The dot-plot is first and foremost. The Fed slashed its forecasts for raising rates from two to none at all for 2019. A single hike is due for 2020, which is still far in the future. This significant downgrade is the primary driver.
2) Balance sheet reduction program: The balance sheet reduction program (Quantitative Tightening) is set to end in September 2019. It will begin falling in May, with tapering down from $30 billion to $15 billion. This is a quicker end than many had expected: for the program to end by year-end.
3) Inflation is now "muted": The FOMC Statement describes inflation as being muted. This is a downgrade to the more neutral descriptions in the past. They also added that "On balance, market-based measures of inflation compensation have remained low in recent months."
4) Growth forecasts slashed: The Fed downgraded estimates for GDP growth from 2.3% to 2.1%. It seems that the combination of the global slowdown, the government shutdown and the petering out of the fiscal stimulus weighs on projections.
5) But unemployment forecast upgraded: The dot-plot sees the drop in the unemployment rate as nearing its end. The unemployment rate is set to bottom out at 3.7% and not 3.5% as earlier forecast.
The unanimous decision sent the greenback plunging. Is there more in store?
More falls for the USD?
Probably so, and for the following reasons:
1) Full Fed reaction takes time: Markets tend to react at the Tokyo Open and then the European open. There is no other way to interpret the decision as very dovish.
2) Yield curve: The Fed decision is felt in the bond market as well. The 10-year Treasury bond yield dropped to around 2.55%. Three-month bills are about 2.41%. While the 10-2 spread is usually quoted, the 10-year to the 3-month range is a better predictor of an upcoming recession. If we get the dreaded yield-curve inversion, things could get even worse for the USD.
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