With the Fed having pulled off what looks like a Goldilocks hike, crushing Treasury shorts and anyone who decided to trade off Goldman’s Tuesday evening equity warning, we’ll now turn to Wall Street for the post-mortem.
Up first is the above-mentioned Goldman, whose cautious call on stocks may prove correct over time – but probably not today.
BOTTOM LINE: The FOMC raised the funds rate target range, as widely expected. The post-meeting statement made only minor changes to the description of the economy and continued to describe risks to the outlook as “roughly balanced.” The statement upgraded the description of inflation mildly, but offset this with a reminder that the Committee’s inflation goal is symmetric.
1. The FOMC raised the funds rate target range, as widely expected, and the median dot in the Summary of Economic Projections continued to show three hikes in both 2017 and 2018. The post-meeting statement made fairly modest changes to the description of the economy, upgrading its description of business investment mildly, and continued to describe risks to the outlook as “roughly balanced.” The statement upgraded the description of inflation to note that it is “moving close to” the 2% target, but balanced this change by adding that inflation excluding energy and food prices is still short of 2%, that the Committee seeks a “sustained” return to 2%, and that its inflation goal is “symmetric.” We see this as a reiteration of familiar principles from the Committee, likely intended to prevent a hawkish misinterpretation of the upgrade to the description of inflation. Minneapolis Fed President Neel Kashkari dissented against the hike.
2. In the Summary of Economic Projections (SEP), participants made modest upgrades to their growth, inflation and funds rate projections, while NAIRU edged lower. The median projections for the funds rate still show three rate increases both this and next year. The median 2019 funds rate edged up to 3.0% from 2.9% previously. The average dot increased 9bps for 2018 and 9bps for 2019, and the 2018 and 2019 modes also rose by 25bps each. Elsewhere, the SEP showed slightly higher core inflation at 1.9% this year and also slightly higher growth next year. The long-run unemployment rate was revised down to 4.7%.
I’d say this qualifies as “preventing a hawkish misinterpretation”…
Treasuries surged after the Federal Open Market Committee raised interest rates as expected and maintained forecasts for additional increases for the next two years, dashing expectations it might signal a quicker pace of hikes.
- Yields were lower by five to 10 basis points at 2:45 p.m. in New York, with the five-year lower by 10 basis points at about 2.03 percent. Yields had risen to their highest levels in at least a year in the past week as market-implied expectations for a quarter-point increase in the fed funds rate approached certainty. Market focus was on any new language in FOMC statement, changes to member forecasts for the funds rate, or both. Most economists and strategists saw more risk of an increase to the 2018 median than to the 2017 median.
- Median forecast for 2019 rose to 3% from 2.875%, while 2017 and 2018 medians remained at 1.375% and 2.125%; 5Y yields reacted most sharply, falling as much as 11bp, and the 5s30s curve rebounded from 102bp to 109bp within minutes
- Before the FOMC meeting, Treasuries advanced led by 30Y, paring a two-week drop and flattening the curve; 5s30s spread approached lowest level since January 2008
- Curve reached session lows after DoubleLine’s Gundlach, speaking on CNBC, said bond market “is set up for a rally in the weeks ahead”
- Rally stalled briefly after the February retail sales report included upward revisions to January’s results and the Empire State Manufacturing Index for March declined less than forecast, however February CPI rose only slightly more than forecast, alleviating concern about pressure on the Fed to accelerate the pace of rate increases