What The Fed’s March Decision Means For Markets

&l;p&g;&l;img class=&q;dam-image bloomberg size-large wp-image-43346233&q; src=&q;https://specials-images.forbesimg.com/dam/imageserve/43346233/960×0.jpg?fit=scale&q; data-height=&q;639&q; data-width=&q;960&q;&g; Jerome Powell, chairman of the U.S. Federal Reserve, exits after a Financial Stability Oversight Council (FSOC) meeting at the U.S. Treasury in Washington, D.C., U.S. Photographer: Andrew Harrer/Bloomberg

Today, at its scheduled March 2019 meeting, the Fed announced no change in rates. This was as expected. What was more interesting was the rate outlook for 2019 and beyond as expressed through the Fed&s;s &l;a href=&q;https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20190320.pdf&q; target=&q;_blank&q;&g;dot plot&l;/a&g;&a;nbsp;and also the Fed&s;s &l;a href=&q;https://www.federalreserve.gov/newsevents/pressreleases/monetary20190320a.htm&q; target=&q;_blank&q;&g;statement&l;/a&g;. Most members of the committee now see no increase in rates for 2019. That&s;s quite a shift. It&s;s driven mainly by a recently softer U.S. consumer and slowing overseas growth. As recently as December,&a;nbsp;many policymakers saw&a;nbsp;one to three hikes as possible for 2019. Now the idea of raising rates twice is a clear minority view. In fact, even looking out to 2021, most members see rates staying&a;nbsp;below&a;nbsp;3%. The main theme from the Fed is one of patience and wait and see.

From a pure policy standpoint, this is good news. Stable rates rather than rising ones are helpful to bond prices and tend to&a;nbsp;support stable or higher equity valuations as well. This is especially true because currently the Fed is relatively less concerned about inflation, seeing it very close to the Fed&s;s 2% target for the foreseeable future. High inflation can be toxic for both stocks and bonds, so its 2% level is positive for markets.

&l;strong&g;Potential Consumer Concerns&l;/strong&g;

However, the problem comes in examining why the Fed has shifted policy quite dramatically since the fall. Weak &l;a href=&q;https://www.bls.gov/news.release/pdf/empsit.pdf&q; target=&q;_blank&q;&g;job growth&l;/a&g; in February and slow &l;a href=&q;https://www.census.gov/retail/marts/www/marts_current.pdf&q; target=&q;_blank&q;&g;retail sales&l;/a&g; in December were both unexpectedly bad and clear concerns, though the data has been choppy and these were one-off reports. The Fed emphasised again a wait and see approach here, with some positive reports and&a;nbsp;recent more positive trajectory providing reasons for optimism.

&l;strong&g;Worries Overseas&l;/strong&g;

The Fed is concerned about overseas growth in Europe and, to a lesser extent, in China. The Fed doesn&s;t see the European situation as recessionary&a;nbsp;though is monitoring it. At the same time, the Fed is monitoring risks from&a;nbsp;Brexit and ongoing trade negotiations. Nonetheless, though again the Fed isn&s;t overly concerned about overseas trends, these have shifted from being a tailwind to a headwind for the U.S. economy on the Fed&s;s current view.

&l;strong&g;Could The Next Move Be A Cut?&l;/strong&g;

While the Fed&a;nbsp;sees the economy currently in a reasonable place with rates broadly neutral, the futures markets now put the &l;a href=&q;https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html&q; target=&q;_blank&q;&g;chance&l;/a&g;&a;nbsp;of a rate cut before the end of the year at around 4 in 10. That may be a disconnect between the view of the markets and that of the Fed, or perhaps the Fed is less keen to articulate&a;nbsp;downside scenarios that could spook financial markets. In fact, at the press conference Chairman Powell made repeated reference to the next Fed move being &q;in either direction&q;. The Fed views the economy as healthy currently and taking a more patient view on its next move, in a sense, this is reflected in a yield curve that is &l;a href=&q;http://www.forbes.com/sites/simonmoore/2019/03/15/what-the-yield-curve-tells-investors-now/&q;&g;flat&l;/a&g;&a;nbsp;rather than &l;a href=&q;http://www.forbes.com/sites/simonmoore/2018/12/04/five-perspectives-on-the-yield-curve-as-a-recession-signal/&q;&g;inverted&l;/a&g;.

&l;strong&g;Market Impact&l;/strong&g;

The Fed&s;s more patient approach and shallower rate trajectory is largely a positive for the bond markets, especially since its bolstered by muted inflation expectations. The picture for equity markets is more nuanced, though &l;a href=&q;http://www.forbes.com/sites/simonmoore/2018/06/12/how-the-sp-500-lost-its-fed-bump/&q;&g;lower rates can help valuations&l;/a&g;, the idea that the Fed is not raising rates due to potential U.S. consumer weakness is a negative for equity markets, as is the weaker picture internationally. Lower rates can be a positive for stocks, but the bad economic news that&a;nbsp;could spur rate cuts is not. The Fed will be watching the next few months of U.S. consumer data very closely to see if the weak reports in recent months were one-offs or signal a more negative, or even recessionary, trend.&l;/p&g;

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