The March Fed meeting needs no further introduction, but we’ll provide the obligatory summary just in case.
2019’s “epic” dovish pivot, first tipped by Jerome Powell on January 4 in remarks delivered while seated next to his predecessors in Atlanta and subsequently echoed by his colleagues, was enshrined in the forward guidance at the January meeting, which also produced a “special” statement on balance sheet policy and opened the door to the end of runoff, an implicit concession to markets following Q4’s dramatic selloff across risk assets.
The January “capitulation” was an effort to make up for the December hike and tone deaf press conference, which was itself viewed (rightly or wrongly) as an inexplicable doubling down on October’s egregious communications misstep. The selloff that accompanied the December meeting extended Powell’s dubious losing record when it came to S&P performance on Fed days and was made all the more perplexing considering it came just weeks after an ostensible effort to make amends for October.
The January minutes underscored the case for “patience” and the following passage from the minutes made it clear that an end to runoff is near:
Almost all participants thought that it would be desirable to announce before too long a plan to stop reducing the Federal Reserve’s asset holdings later this year.
The Fed’s counterparts around the world have generally fallen in line, adopting their own dovish slants and risk assets have rallied accordingly. Meanwhile, bonds remain en vogue as worries about global growth persist – those worries, combined with still-subdued inflation, further bolster the case for “patience”.
As for the March meeting, market participants will key on the dots (Whether “catching down” to the January forward guidance means one hike is projected for 2019 or no hikes) and the balance sheet discussion (Will we get an official end date or not? Are the operational details hashed out yet?). The economic projections will likely be revised modestly lower and there are expected to be minor adjustments to the statement.
Read the full preview and a summary of analyst opinions
Here’s a snapshot of YTD local currency returns across assets (current through Monday):
And I suppose we’ll run through the obligatory annotated charts. Really, “long way from neutral” and Powell’s comments in Atlanta are the two most pivotal moments, although clearly, you can label any number of points on these visuals (e.g., the January meeting, the December meeting, Trump’s decision to accuse Powell of not being able to “putt” on Christmas Eve, [fill in the blank with your favorite dovish soundbite]).
Here’s stocks and HY credit (volatility has obviously collapsed across assets – more here):
Here’s “reflation” (generally speaking):
And here’s real yields and financial conditions:
Finally, the dollar has been a bit of a conundrum for a lot of folks, given expectations that the dovish pivot “should” have catalyzed weakness. Instead, the concurrent dovish lean from the Fed’s global counterparts combined with the whole “cleanest dirty shirt” narrative re: the US economy has led to a kind of sideways stalemate since the January meeting.
And without further ado, here are the main points:
- FED SIGNALS NO RATE HIKE THIS YEAR WITH ONE INCREASE IN 2020
- FED LEAVES RATES UNCHANGED, SAYS ECONOMIC GROWTH HAS SLOWED
- FED TO TAPER BALANCE-SHEET ROLLOFF, SEES IT HALTING END-SEPT
Obviously, the big news is that the dots now tip no hikes in 2019 and one in 2020 which, incidentally, is precisely what Goldman predicted.
Additionally, the balance sheet runoff will be tapered. Specifically, the cap on monthly redemptions of Treasury holdings will drop to $15 billion from $30 billion starting in May. Runoff will end in September.
From October, principal repayments from agency and MBS securities will be reinvested in Treasurys “subject to a maximum of $20 billion a month.” Over and above that, principal payments from agency and MBS securities will be plowed back into agency MBS.
As far as whether we’re going to get a reverse twist (in the interest of freeing up room for a sequel to the original Operation Twist later), it sounds like they’re going to demur on that – for now.
“Principal payments from agency debt and agency MBS below the $20 billion maximum will initially be invested in Treasury securities across a range of maturities to roughly match the maturity composition of Treasury securities outstanding”, the plan reads, adding that “the Committee will revisit this reinvestment plan in connection with its deliberations regarding the longer-run composition of the SOMA portfolio.”
Below find the dot plot comparison, the full SEP and the full statement followed by the balance sheet plan.
Information received since the Federal Open Market Committee met in January indicates that the labor market remains strong but that growth of economic activity has slowed from its solid rate in the fourth quarter. Payroll employment was little changed in February, but job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Recent indicators point to slower growth of household spending and business fixed investment in the first quarter. On a 12-month basis, overall inflation has declined, largely as a result of lower energy prices; inflation for items other than food and energy remains near 2 percent. On balance, market-based measures of inflation compensation have remained low in recent months, and survey-based measures of longer-term inflation expectations are little changed.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. 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. 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.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
Voting for the FOMC monetary policy action were: Jerome H. Powell, Chairman; John C. Williams, Vice Chairman; Michelle W. Bowman; Lael Brainard; James Bullard; Richard H. Clarida; Charles L. Evans; Esther L. George; Randal K. Quarles; and Eric S. Rosengren.
Balance sheet plan
In light of its discussions at previous meetings and the progress in normalizing the size of the Federal Reserve’s securities holdings and the level of reserves in the banking system, all participants agreed that it is appropriate at this time for the Committee to provide additional information regarding its plans for the size of its securities holdings and the transition to the longer-run operating regime. At its January meeting, the Committee stated that it intends to continue to implement monetary policy in a regime in which an ample supply of reserves ensures that control over the level of the federal funds rate and other short-term interest rates is exercised primarily through the setting of the Federal Reserve’s administered rates and in which active management of the supply of reserves is not required. The Statement Regarding Monetary Policy Implementation and Balance Sheet Normalization released in January as well as the principles and plans listed below together revise and replace the Committee’s earlier Policy Normalization Principles and Plans.
- To ensure a smooth transition to the longer-run level of reserves consistent with efficient and effective policy implementation, the Committee intends to slow the pace of the decline in reserves over coming quarters provided that the economy and money market conditions evolve about as expected.
- The Committee intends to slow the reduction of its holdings of Treasury securities by reducing the cap on monthly redemptions from the current level of $30 billion to $15 billion beginning in May 2019.
- The Committee intends to conclude the reduction of its aggregate securities holdings in the System Open Market Account (SOMA) at the end of September 2019.
- The Committee intends to continue to allow its holdings of agency debt and agency mortgage-backed securities (MBS) to decline, consistent with the aim of holding primarily Treasury securities in the longer run.
- Beginning in October 2019, principal payments received from agency debt and agency MBS will be reinvested in Treasury securities subject to a maximum amount of $20 billion per month; any principal payments in excess of that maximum will continue to be reinvested in agency MBS.
- Principal payments from agency debt and agency MBS below the $20 billion maximum will initially be invested in Treasury securities across a range of maturities to roughly match the maturity composition of Treasury securities outstanding; the Committee will revisit this reinvestment plan in connection with its deliberations regarding the longer-run composition of the SOMA portfolio.
- It continues to be the Committee’s view that limited sales of agency MBS might be warranted in the longer run to reduce or eliminate residual holdings. The timing and pace of any sales would be communicated to the public well in advance.
- The average level of reserves after the FOMC has concluded the reduction of its aggregate securities holdings at the end of September will likely still be somewhat above the level of reserves necessary to efficiently and effectively implement monetary policy.
- In that case, the Committee currently anticipates that it will likely hold the size of the SOMA portfolio roughly constant for a time. During such a period, persistent gradual increases in currency and other non-reserve liabilities would be accompanied by corresponding gradual declines in reserve balances to a level consistent with efficient and effective implementation of monetary policy.
- When the Committee judges that reserve balances have declined to this level, the SOMA portfolio will hold no more securities than necessary for efficient and effective policy implementation. Once that point is reached, the Committee will begin increasing its securities holdings to keep pace with trend growth of the Federal Reserve’s non-reserve liabilities and maintain an appropriate level of reserves in the system.