As expected, the Fed kept rates unchanged Wednesday. However, a more than anticipated dovish tone in their language and timelines surprised markets and sent bond yields sharply lower.
The Federal Open Market Committee concluded its two-day March meeting this week and its policy statement and comments following have changed the rate management landscape significantly. The benchmark fed funds rate was again kept in its range of 2.25 to 2.50 percent as the trade had projected. But a substantial shift in the Fed’s outlook on the economy was clear and signals a new “patient” approach moving forward.
Evidence of an economic slowdown that has been batted about in financial circles since the end of 2018 has made its way into the Fed’s outlook. Following the well-documented easing and stimulus that pulled us out of the financial crisis, the Fed has confidently been tightening to achieve a more normal balance. Strength in the economy has allowed rates to be bumped back up nine times since the end of 2015. But signs the economy is slowing has caused the Fed to take a pause and adjust their approach.
Forecasts for economic growth have been ratcheted back with gains for 2019 trimmed to 2.1 percent vs 2.3 percent projected last December. Inflation expectations were cut to 1.8 percent from December’s 1.9 forecast. Even the unemployment data, that has been a champion of the economic recovery, is now pegged to blip up this year 0.2 percentage points to 3.7 percent from last December projections.
The change in economic outlook has prompted a change in Fed policy. The December policy outlook that had forecast the potential for two more rate hikes this year has been dramatically reduced. Analysts now project no rates hikes at all in 2019, with maybe one in 2020. In addition, the Fed announced the end of its balance sheet runoff program by September of 2019.
Despite the Fed’s view that the jobs market “remains strong”, Chairman Powell stated, “It may be some time before the outlook for jobs and inflation calls for a change in policy.”
The change in the Fed’s outlook sent bonds soaring with yields on the 10-Year dropping to levels not seen in over a year.
Initial market reactions may have been somewhat of an overreaction with yields climbing back a little yesterday. But shifts in outlook and policy are real and markets will now be keying on any economic data that signals a further slowdown or healthy growth.
10-Year Treasury Note Futures (TYM19)
20-Day SMA 122-175
50-Day SMA 122-095
100-Day SMA 121-020
14-Day RSI 62.69%
Implied Vol 03.25%
CME 10-Year Treasury Note futures can be traded on your SteetSmart Central platform under the symbol TYM19.
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