Powell reassures but FOMC divided
Markets initially breathed a sigh of relief that the Federal Reserve’s first rate rise under new chair Jerome Powell was accompanied by accoutrements that did not deviate significantly from best guesses.
Later though, U.S. shares flitted in and out of the red and ended slightly lower. Traders were sensitive to any perceived insinuation that inflation could unexpectedly accelerate. After all, regardless of Powell’s emollient tones during his first post-meeting press conference, policymakers were less hesitant than in December to upgrade their growth outlook and the pace of that growth, amid tax cuts and government spending plans. Intended or not, they implied the door remained open for policy to accelerate with growth if need be. Furthermore, Federal Open Market Committee (FOMC) members were divided on whether three or four rate rises were appropriate in 2018.
Lots of tiny tightening
Changes in the committee’s policy statement added to the impression of FOMC dissonance on economic conditions. Inflation on a 12-month basis was now expected to rise 'in coming months' rather than 'this year'. More broadly, 2018’s growth projection rose 20 basis points to 2.7%.
Additionally, whilst the key thrust of policy met expectations, the FOMC took many opportunities to tighten at the margin. These included ‘dot plot’ rate projections that pointed to one more rate rise in 2019 than in December, to take the median to 2.9%, and a median long-run rate that inched up to 2.9% from 2.8%, breaking that figure’s glacial declining trend since 2012.
Fleeting reassurance
Powell downplayed the significance of a sharper push higher for 2020—to 3.4% from 3.1%—suggesting it looked far enough ahead to be treated as highly speculative. But the market’s reassured reaction was fleeting. The Fed chair also attempted to address perceptions that either economic growth might be in transition to a faster pace, or the Fed’s view might be, or perhaps both. Inflation might be 'above or below' the Fed’s approximate 2% target at times he said, expecting only gradual upward pressure, despite sharp cuts in policymakers’ employment predictions. His Fed would take the 'middle ground' he noted, and he was 'surprised' that wage growth was so modest.
Treasurys spike, then slide
The comment was enough to trim inflation-linked ‘breakeven’ Treasury rates, but the broader market was less convinced. Indecisive cross-market reactions to conflicting FOMC signals were just as clear in U.S. government debt.
At one point, the 10-year Treasurys sell-off looked on course to hoist yields sustainably back above 2.9%. But after a spike the rate returned to similar levels as before the policy update.
Some of the market’s wavering was likely due to seepage of deteriorating U.S.’s international trade relations into Fed proceedings, amid reports that China was readying its own tariffs. These could coincide with duties of as much as $60bn on Chinese goods to be announced on Thursday. Powell did not 'expect changes in trade policy to have any effect', though following conversations with business leaders, FOMC members reported that trade policy was 'a concern going forward' for growth. This helps explain the dollar’s fade from as high as ¥106.63 to the high ¥105s. The move was broadly mirrored in other major pairs, though to a lesser extent, and inversely by gold, which extended modest gains on the day to a $21 rise.
An uncertain take on the Fed and bearish geopolitical currents are likely to preoccupy markets for the rest of the week. If so, that would confirm the new chair’s first opportunity to provide a calming influence on markets could have gone better.
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