global perspectives
Fed vs Trump turns into Fed vs Markets.
The Federal Reserve raised its benchmark interest rate by a quarter of a percentage point on Wednesday but shifted the 2019 dot down.
What was supposed to be an uneventful Fed meeting with a pre-telegraphed hike, turned into an important event given recent market volatility and President Trump’s sustained criticism of Fed policy making – something Fed Chair Jerome Powell said has no influence on monetary policy making.
The Fed delivered a necessary nod to the expected slowdown in US growth next year, against a backdrop of global cross-currents. The median “dot plot” shifted to two hikes for next year, down from three.
In addition to a few subtle and arguably dovish changes to the statement, the press conference was quite evenly balanced, with Powell attempting to hash out the data dependency regime which the Fed is now entering, while not sounding overly optimistic or displaying any unusual pessimism.
On its own, the shift from the Fed was expected and a step in the right direction, as well as consistent with current economic conditions in the US. However, judging by market reaction, it appears that risky asset markets wanted a stronger put from the Fed given the ongoing recession obsession which is taking over the market sentiment.
We continue to think the Fed is likely to hike twice next year – a view we’ve held since September – with a higher probability of just one hike than three. In addition, we now think that if market volatility continues, the pace of unwinding the balance sheet will also come under the scope of a potential shift – even though Powell defended the current autopilot regime today.
All in all, the "Powell Put" does exist but current economic conditions, whereby unemployment is below 4% and inflation is around 2%, means that this dovish dot plot shift is the only Christmas present the market will get before the year runs out.
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