The Fed gives the financial markets their wish list

FAN Editor

Interest rates fell and stocks went flying after the Fed’s post meeting statement gave the market just about everything it wanted.

The Fed left interest rates unchanged, as expected, and suggested that it would be flexible on its balance sheet strategy.

Fed funds futures were showing just a 10 percent chance of a single rate hike in 2019, down from 20 percent earlier in the day, according BMO. Bond yields fell and stocks popped, with the Dow soaring over 400 points.

Strategists said the Fed statement was very dovish.

Ben Jeffrey, rate strategist at BMO, said the Fed suggested in the statement there could be more risks to the economy by removing the phrase that risks were ‘balanced. “That would be consistent with their pivot to a more accommodative stance,” he said.

Some economists had been expecting the Fed to include a reference to a ‘patient’ approach to raising interest rates, since inflation is low and there is no reason to rush. But they also expected Powell to mention the balance sheet in his press briefing.

“”It doesn’t change the message too much, but it’s consistent with what they’ve been saying since their December meeting – that they’ll be patient. They don’t commit to any further rate hikes in the near term. They say they’re going to be patient. It’s all in context of data dependence,” said Tom Simons, money market economist at Jefferies. “It doesn’t say they’re done by any means. It says they’re going to be patient before they raise interest rates. It’s more dovish than hawkish. But it doesn’t signal a shift in stance.”

The Fed put out a separte statement on the balance sheet.

“They put out a statement on the balance sheet that said they might change if they need to but they didn’t say what compelled them to do that,” said Simons.

The 2-year Treasury yield closely reflects Fed policy. The 2-year yield fell to 2.54 percent after the statement, from 2.58 percent. The 10-year yield fell to 2.70 from 2.72 percent.

Fed Chairman Jerome Powell was to brief the media at 2:30 p.m. ET. In prior appearances, he moved the market with comments about the neutral rate and rundown of the Fed’s balance sheet being on ‘auto pilot.’

Traders expect to hear some more comments from Powell on the Fed’s program to unwind the balance sheet, and that it is now reviewing the program. Markets have been concerned the Fed is removing liquidity with the program. JP Morgan economists Wednesday revised their forecast that the Fed will reduce the balance sheet to $3.5 trillion, from an earlier forecast of $3 trillion.

“Powell could have used different words but I don’t think anything he said was really outrageous,” said Marc Chandler, Bannockburn Global Forex chief market strategist.

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