The Fed had a somewhat cautious and dovish approach, leaving many confused. Is March off the table or is it still on? What about risks?
Here are 4 opinions from various banks. Note that some still see a hike in the upcoming meeting:
Here is their view, courtesy of eFXnews:
BofA Merrill
The modest tweaks the FOMC made to its growth outlook and the inclusion of language on the potential impact of international economic and financial developments on its assessment of the balance of risks provided little near-term signal for the USD, despite driving a modest dollar selloff post statement.
Given China-driven volatility since end- 2015, and the slow momentum of US growth in recent months, these changes are understandable and largely expected by the market. Importantly, the tweaks do not suggest a fundamental re-assessment of the Fed’s outlook, and therefore, buys them time to assess data and global developments between now and March.
This statement leaves March on the table (although not our base case), which should keep the USD supported but certainly not taking off. The USD has outperformed versus rate differentials since end-2015 as Fed expectations have re-priced to include only one additional hike this year.
While the dollar could enjoy some residual safe haven bid, a failure of US data to pick up could leave the USD vulnerable as a result. But for now the FX impact of the January FOMC statement is pretty modest.
CIBC
As widely expected the Fed refrained from another interest rate hike this month, and while the statement was a little dovish in respect to the international outlook and what that could mean for US growth and inflation going forward, the door was certainly not closed on another hike in March. Instead of saying that the risks around their forecast were “balanced” as before, a mention was made to “closely monitoring global economic and financial developments” to Assess the “balance of risks” to the outlook. That suggests the Fed are at least a little bit concerned about the overseas outlook and how that could impact the pace at which they would be hiking interest rates.
However, even with that more uncertain international backdrop and a domestic economy that “slowed late last year”, the Fed still expects that with gradual adjustments in monetary policy economic activity will expand at a “moderate” pace going forward and labour market indicators will continue to strengthen. All that sounds like a Fed that wants to continue on this gradual hiking path at the next meeting, but could be dissuaded to do so by international and financial market developments. We currently forecast a hike in March, but then a pause after that and only three hikes in total this year vs the four which the Fed had in its last dot plot projections.
Nomura
Today’s FOMC statement highlighted a challenge for the FOMC and market participants. The Fed, in effect, acknowledged that recent economic data have been weak and that recent financial and foreign developments may pose a risk to the US economy. Those conclusions are not really surprising and they have been reflected in financial markets for some time.
Essentially, the FOMC was sending a signal that its assessment of the outlook may be moving closer to that of the market. But financial markets took the FOMC’s statements not as a sign that the gap between the market and the Fed was closing, but rather as a reason to reduce their expectations for future rate hikes even more. That may have been an overreaction.
We would still argue that the right forecast is for two increases in short-term interest rates this year, while the market is pricing only about one.
Danske
As expected, the Fed funds target rate was unchanged at 0.25%-0.50%. The vote was unanimous. The statement was dovish and more or less in line with our expectations.
Overall, the statement supports our view that the Fed will also skip March, although Fed is keeping the doors open.
The main change in the statement was that Fed is no longer ‘reasonably confident’ that inflation will reach 2% in the medium term.
As expected, the Fed reinstated that it is ‘monitoring global economic and financial developments’. It is also worried about the fall in market inflation expectations.
We stick to our view that the Fed will increase the Fed funds target rate three times this year (April, September and December). However, we still believe there are downside risks to this call, as the Fed will not risk tightening too much, too quickly, in our view.
Markets have still priced in one full hike this year and one next year.
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