According to the analysts at BNP Paribas, if the point of a rate hike is to tighten financial and monetary conditions, the Fed’s third hike in this cycle failed miserably: the S&P rallied 0.8% on the day, the dollar (DXY) softened by 1% and bond yields declined, as did the VIX and this was, in BNPP’s view, a very dovish rate hike.
“Why did the market react this way? It appears a number of participants had expected the Fed ‘dotplot’ to signal four rate hikes this year. But the Fed stuck at three, for several reasons, we think. For one, the Fed forecasts did not change much. Second, the Atlanta Fed’s nowcast signals Q1 growth of under 1% saar. Third, there is no indication yet of how expansionary fiscal policy will be. And, fourth, upping the number of dots would have been tantamount to the Fed admitting it is behind the curve. We continue to expect two more hikes in 2017 (in June and September), followed by four in 2018; we will review after we have fiscal details, with President Donald Trump’s ‘skinny budget’ having provided very few so far.”
“The Fed’s assessment of the economy changed little, though it upgraded its view on investment. The pickup in headline PCE inflation to 1.9% y/y was mentioned, but with the expected qualification that this partly reflected a temporary boost from energy prices. While noting that core inflation remains below 2%, the FOMC sounded more confident inflation would rise.”