• Fed reduces economic and rate projections for 2019 and 2020
  • Dollar drops, equities recover then fall, interest rates decline
  • Powell lauds economy while Fed rate policy pauses

FOMC Policy and Projections

The Federal Reserve downgraded its view of US growth this year and next, officially moved to a neutral rate policy yet kept its optimism about the general state of the American economy which Chairman Jerome Powell referred to several times “As in a good place.”

In its closely followed Projection Materials which the central bank issues four times a year, in March, June, September and December, economic growth in 2019 dropped to 2.1% from 2.3%, core PCE inflation slipped to 1.8% from 1.9% and the estimated fed funds rate at year end fell to 2.4% from 2.9%.

In the six months since the September release of the same information the Fed’s estimate for GDP has fallen 0.4% from 2.5%, core inflation 0.3% from 2.1% and the fed funds rate has decreased 0.7% to 2.4%.

From a policy prospective the drop in the fed funds estimate brought the bank’s three year old rate hike campaign to a halt.

In December's materials  the 2.9% forecast for 2019 coupled with the 0.25% increase at that meeting meant two more hikes would be needed this year to 3.0% to cover the 2.9% goal.  The new projections with 2.4% this December, which would strictly require one 0.25% reduction from the current 2.5%, and 2.6% by December 2020, which would need one or two hikes depending on the action this year, imply some possibility for rate flexibility, in practice it is a formula for the Fed to be inactive through the end of next year.

The Fed also clarified its intentions on the disposition of its balance sheet acquired in the years after the financial crisis of 2008 and recession. “Since 2017 we have been allowing our assets to decline. We intend to slow the runoff of assets in May and stop in December,” said Chairman Powell in the press conference following the policy announcement.

Market Reaction

Markets reacted swiftly to the change in Fed policy. The dollar fell sharply losing a figure against the euro to 1.1448 and a figure versus the yen to 110.53, though it regained some of its losses against both currencies into the close.

Equities were whipsawed with the Dow initially running higher on the dovish rate news but slipping into the finish, closing off 141.71 points, 0.55% at 25745.67. The S&P 500 lost 8.34 points, 0.29% to 2824.23.

Dow

Dow

CNBC

Treasury prices moved higher and rates lower with the 10-year yield losing 9 points to 2.53% almost at the bottom of its 52 week range of 2.52% to 3.26%. The 2-year lost 7 points of yield to 2.40% its lowest return in almost a year.

10-Year Treasury Yield

Chairman Powell in his lengthy news conference stressed the good condition of the US economy. The FOMC statement said “The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes.”  The closing sentence of that paragraph was unchanged from January, “In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.”

Is it possible that the international risks cited by the Chairman Powell, Brexit, the US-China trade dispute and slowing global growth resolve themselves by the end of the second quarter and the Fed’s discretion and patience is rewarded with revived prospects for the US economy? Chairman Powell would probably answer ‘Yes, but that is not the data we have now.”

 

 

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.

Analysis feed

Latest Forex Analysis

Editors’ Picks

EUR/USD's range play continues ahead of Eurozone Consumer Confidence

EUR/USD remains directionless despite the drop in the US treasury yields. An above-forecast Eurozone Consumer Confidence will likely push the pair higher to the trendline falling from June highs. 

EUR/USD News

GBP/USD sits at 2-month tops ahead of key Brexit talks

Fresh optimism surrounding the Brexit deal propels GBP/USD to a two-month high. Brexit talks between the EU's chief negotiator Michel Barnier and UK Brexit Secretary Stephen Barclay will be the key.

GBP/USD News

USD/JPY: Bears eyeing break below 107.45

USD/JPY trades modestly flat, with the bias leaning to the downside, as we wind down into the close for the week following a data-heavy number of sessions which have left more questions unanswered and the outlook murky. 

USD/JPY News

Markets unmoved by Fed cut and pause

The Federal Reserve’s latest twist in monetary policy, reducing the fed funds for a second time in two months and then pausing for instructions has left markets without a clear direction on interest rates. Equites ended mixed.

Read more

Gold holds on to recovery gains amid trade/political pessimism

In addition to bouncing off multi-month-old rising trend-line, Gold gains support form recently downbeat trade/political headlines while taking the bids to $1,500 during Friday’s Asian session.

Gold News

Forex Majors

Cryptocurrencies

Signatures