The Federal Open Market Committee (FOMC) has recently released its latest statement and economic projections. The Fed’s shift in its forward guidance suggests a dovish stance, leading to market expectations of rate cuts by year-end.
Introduction:
The Federal Open Market Committee (FOMC) is the monetary policy-making body of the Federal Reserve System. It is responsible for setting the target range for the federal funds rate, which is the interest rate at which banks lend reserves to one another overnight. The FOMC meets regularly to assess the state of the economy and determine the appropriate course of monetary policy. The committee’s most recent statement and economic projections indicate a shift towards a more dovish stance.
FOMC’s Dovish Shift:
The FOMC’s latest statement and economic projections indicate a significant change in the committee’s forward guidance. The committee’s previous statements included language that suggested ongoing increases in the target range for the federal funds rate may be appropriate. However, the latest statement has changed that language to indicate that “some additional policy firming may be appropriate.” This shift in language indicates a step down in the committee’s motivation to hike interest rates further.
The committee’s economic projections also suggest a more dovish stance. The median projection for the federal funds rate for the end of 2019 has been revised down from 3.1% to 2.9%. Additionally, the committee’s longer-term projection for the federal funds rate has been revised down from 3.0% to 2.8%.
Impact on Markets:
The FOMC’s dovish shift in its forward guidance has led to market expectations of rate cuts by year-end. The futures market is currently pricing in a 25 basis point cut in the federal funds rate by December 2019. This shift in market expectations has led to a rally in equities and a decline in the US dollar.
The dovish shift in the FOMC’s forward guidance is largely due to concerns over the global economic outlook and subdued inflation pressures in the US. The committee’s statement noted that “global economic and financial developments continue to pose risks” and that inflation has been running below the committee’s 2% target.
Conclusion:
The FOMC’s recent statement and economic projections suggest a significant shift towards a more dovish stance. The committee’s language in its forward guidance indicates a step down in its motivation to hike interest rates further. The futures market is pricing in rate cuts by year-end, and this shift in market expectations has led to a rally in equities and a decline in the US dollar. The FOMC’s dovish shift is largely due to concerns over the global economic outlook and subdued inflation pressures in the US.
