Over the weekend, in our Fed preview, we noted that there was only one real way for the Fed to botch the March meeting and presser.
Here, specifically, is what we said:
All eyes (and ears) will be trained on the balance sheet discussion and it’s possible that a “failure” to adequately address the issue (where “failure” at this point probably means demurring on an announcement of the end date for runoff and then not providing any meaningful clarity beyond what we got in January) could prompt some indigestion from markets.
If that was paired with a dot plot that still showed one hike in 2019 (as opposed to zero hikes this year) it might have been bad news for risk assets, especially at a time when the YTD euphoria is at something of a crossroads, as questions about the capacity (or maybe “willingness” is a better word) of DM policymakers to go back down the accommodation road are colliding with worries about diminishing returns on Chinese credit growth, still lackluster data from abroad and doubts about the Sino-US trade deal to haunt investors wondering whether there’s any gas left in the tank following the surge off the late-December lows.
The only other real “risk” from the March Fed meeting revolved around the possibility that if Powell came across as “too” dovish, it might accidentally “confirm” the market’s worst slowdown fears.
Well, suffice to say Powell delivered the exact opposite of the “botch” scenario outlined above. The dot plot now tips no hikes in 2019 and not only was an end date for runoff announced, many of the operational details were laid out as well.
As far as the downgrades to the outlook were concerned, there wasn’t anything particularly dramatic there, or at least nothing that stuck out like a sore thumb, the way the ECB’s cut to the 2019 euro-area outlook did earlier this month.
Powell went out of his way in the presser to reiterate the “patient” message and in the course of doing so, he reiterated his “good place” characterization of the US economy on so many occasions that cataloging them all would be well nigh impossible.
As far as where things go from here, it’s pretty clear that barring some kind of pretty dramatic inflection higher in global growth and/or convincing signs that the US economy is going to start firing on all cylinders again, the hiking cycle is probably over.
“I feel very comfortable telling you they’re done”, BMO’s Scott Kimball told Bloomberg over the phone, adding that “if you’ve been underweight duration, bearish on rates, this is probably the moment where you have to reassess that positioning.”
The dollar’s drop might need to be taken with a grain of salt though, because as mentioned earlier today and on countless occasions since January, until the rest of the world stabilizes, the US is still the “cleanest dirty shirt”, a deplorable fiscal trajectory notwithstanding. “It’s more about growth outside the U.S. and whether China and Europe can pick up, and I think that will be important for the dollar beyond the very short-term reaction”, UBS said Wednesday afternoon.
Capital Economics is penciling in a cut as the next move. “We expect economic growth to remain well below trend throughout 2019 which is why we think the Fed’s next move will be to cut interest rates”, they wrote, in a note.
For his part, Nomura’s George Goncalves isn’t throwing in the towel on 2020 altogether. “If they are able to keep the U.S. economy in growth mode and that leads to inflation, these dovish actions will allow them to hike in 2020”, he told Bloomberg. “This is the Fed trying to get out ahead of fiscal drag that lies ahead in a world still fraught with external risks that could slow the U.S. economy even further”, Goncalves added. You’re reminded that Nomura’s call was for the dots to show no hike in 2019.
The cross-asset knee jerk was predictable. Stocks up, dollar down (although the former would eventually close lower).
EM up, gold up.
Treasurys rallied, banks ground to session lows (despite curve steepening – 5s30s wider by ~5bps), rate cut odds jumped, the CDX.HY index hit the highest (price wise) since early October, etc., etc.
Also predictable was the chorus of feigned incredulity and make-believe discontent from all corners, as though the most offensive thing going on in the world right now is a dovish pivot from central banks who, ironically in this context, have been pigeonholed into this in part because of offensive populist politics which have found expression in the trade conflict and Brexit. Powell talked extensively about both of those things in the presser.
It’s the damndest thing: the descriptions of Powell since January are so laughably bombastic that you’d think he was embroiled in some kind of scandal not involving monetary policy. Sure, there are those who habitually insist that post-crisis monetary policy is itself scandalous, but you don’t have to look very hard to find normally reserved people tossing “pathetic” tomatoes at Powell and peppering ol’ Jay with questions about his “spine” (or, more to the point, where his spine went).
To be clear, if the only thing you have to be offended about is a dovish capitulation by the Fed, well, count yourself lucky. In the same vein, if this continuation of January’s relent has you irritated on principle (as opposed to irritated because you got caught on the wrong side of the trade, which is a totally legitimate reason to be irritated), well then you may need to seek professional help. Because while being passionate about “sound” money is indeed an admirable quality in a person, if you get to the point where something like a shift lower in the Fed’s dot plot is prompting you to rage-tweet and cast insane aspersions at policymakers, then it’s probably safe to say your fuse is too short.
On the other hand, don’t let it be lost on the calm among you that the end of runoff prior to a complete unwind of the post-crisis balance sheet expansion pretty much by definition means we’ve entered the era of explicit debt monetization. That is in fact somewhat disconcerting, although I would contend it’s nothing that should ruin your day. After all, it’s not like anyone was under the impression the Fed was going to completely wind down the balance sheet. Exactly nobody thought the balance sheet was going to return to its pre-crisis levels, so please, don’t pretend like anyone did.
At the end of the day, this just is what it is. We’ve said it before and we’ll say it again: It’s the same folks who late last year lampooned the Fed for its role in “causing” the Q4 market turmoil who are busy rolling out the derision now that the same Fed is trying to make amends.
One person who is probably pretty pleased with this situation and therefore won’t be throwing any more tomatoes Powell’s way is “the gentleman” in the White House who, a couple of Saturdays ago, reiterated that a stronger dollar and QT were not acceptable going forward…