Tightening is so last year.
That’s the title of BNP’s March Fed recap and it does a nice job of capturing the gist of things while employing a bit of timeless humor without lapsing too far into the kind of ill-fated pop cultural references the sellside often bungles in the course of attempting to write funny headlines.
We’ve already written one postmortem in addition to our full March Fed post (on top of countless previews), but given the gravity of what was, ultimately, yet another “dovish surprise” delivered against the odds (i.e., the FOMC managed to clear what many thought was an impossibly high bar for out-doving themselves) it’s worth quickly running through some commentary from Wall Street’s reaction pieces.
Starting with the BNP note mentioned above, the bank marvels that “the Fed exceeded our dovish expectations” an outcome they say supports the house “view for a steeper US yield curve and higher inflation expectations (breakevens) in the second quarter.”
“While we suspect the flatter projected rate path to be the result, at least in part, of a more dovish reaction function, the Committee made downgrades to its economic projections and assessment of current conditions”, BNP continues, adding that “given the limited amount of data thus far this year and degree of possible one-offs that could reverse, the Fed making these downgrades themselves suggests a fundamentally more dovish Committee.”
Long story short, BNP does not think the Fed will hike again this cycle. “Having [shifted median rate expectations to show no hikes in 2019], we think the bar for initiating hikes this year, already high to begin with, is now higher still, and would likely require a re-acceleration in growth and material rise in spot inflation to compel the Fed to do so”, the bank concludes.
“Just when you thought the Fed could not possibly deliver another dovish surprise, they did”, BofAML’s Hans Mikkelsen wrote on Wednesday afternoon, before reminding you that “chair Powell’s recent discussions on multiple occasions about inflation targeting gave it away so the Fed’s newfound willingness to stimulate more and run inflation above target should not be a huge surprise.”
That said, BofA reiterates a point we made on Wednesday afternoon, which is that the Fed’s modest downgrades to the outlook were not nearly as foreboding as the ECB’s, which means Powell appears to have been some semblance of successful in walking the fine line between citing slowing growth as a reason to be dovish while not accidentally “confirming” everyone’s worst fears.
“Of course communicating dovishness is always tricky as there is a delicate balance between the benefit of stimulus and the underlying driver, which is economic weakness”, Mikkelsen goes on to say, before suggesting that “with stocks settling at the end of the day roughly unchanged compared with pre-FOMC it appeared the Fed, unlike the ECB at its meeting recently, succeeded.”
The jury is still out on that, and Thursday will be interesting.
“Fed officials had clearly communicated that they intended to end balance sheet run-off this year, but the announcement at this meeting was still earlier than expectations”, Credit Suisse remarked in their own recap. Perhaps what they meant to say was that the announcement at this meeting was “still earlier than our expectations” because certainly some folks expected the announcement today, even if getting the details did come as something of a “surprise.” Still, Credit Suisse is sticking with their call for one hike in 2019. To wit:
Overall, today’s meeting was surprisingly dovish. A large majority of the FOMC is projecting no rate hikes this year, and the committee has moved quickly to begin the end of balance sheet reduction. Recent weakness in cyclical data and below-target inflation support a patient outlook for now, but, in our view, these circumstances may be changing later this year as growth stabilizes and as inflation risks begin to tilt to the upside. We continue to expect one hike this year at the December meeting.
SocGen, by contrast, is pleased to inform you that their call for no hikes in 2019 (see here) has now been validated. “The Fed joined our ‘no hikes’ club “, the bank’s Omair Sharif wrote, a couple of hours after the Powell presser in a note aptly entitled “Welcome to the club.”
Because you’ve all probably had enough of our editorializing around this for one day, we’ll just leave you with Sharif’s quick take.
Remarkably, in just six months, the Fed has gone from an outlook with rates in restrictive territory to rates still somewhat accommodative by the end of 2021. Meanwhile, the Fed released its plan to taper the balance sheet runoff starting in May and end it altogether by the end of September. The Summary of Economic Projections (SEP) cut growth this year and raised the unemployment rate slightly, in line with our estimates. In short, this was an even more dovish outcome than most market participants expected.