Fed leaves interest rates steady, says will be 'patient' on future hikes

Watch the Fed’s Press Conference Wednesday
Watch the Fed's Press Conference Wednesday

02 February, 2019

The decision at the Fed's first policy meeting of the year was expected after central bankers signalled strongly in recent weeks that they meant to tread cautiously about any further moves.

As a result, the greenback was initially on the backfoot and US yields were extending their decline, (The US 10-year yield fell 4bp to 2.63%).

Worries that the Fed would raise rates swiftly had spooked markets late a year ago.

Financial markets dove afterward, upset that in his news conference, Chairman Powell had sketched a rosy view of the economy and appeared to suggest that the Fed would likely resume raising rates in the coming months.

Signaling a pause in rate increases "was a pretty good way to take out insurance", in effect a decision to keep a looser-than-anticipated monetary policy in place in hopes of skirting some of those risks, Sharif said.

Many market participants are now calling the new makeover for the Fed the "Powell Put".

Oil prices rose after USA government data showed signs of tightening supply and as investors remained concerned about supply disruptions following US sanctions on Venezuela's oil industry. If anything, the current state of the U.S. government shutdown and gridlock reinforces our conviction that the prospects for passing USMCA/NAFTA 2.0 through Congress remain challenging, which should put significant pressure on CAD later this year; we are well- positioned for such difficulty through our calendar call spread.

Instead, the bar for another rate hike has now risen, a fact that doesn't speak well about the continued durability of the USA economy's near decade-old recovery from the 2007-2009 financial crisis and recession.

The European slowdown has raised concerns at the European Central Bank.

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So in the end - anyone who wanted the FED to issue a dovish statement - got what they wished for.and while it appears as if the move suggests that the U.S. is faltering - we would argue that the earnings reports and the macro data in the United States negate that argument.but I do think that he (jay Powell) is concerned about the ongoing trade dispute with China and slowing or stagnating growth in Europe.

Chairman Powell will be asked about all these threats to growth, and investors will gauge his responses to try to assess how concerned the Fed is.

President Trump, meanwhile, has been an outspoken critic of the Fed's interest rate hikes. Since the selloff peaked in December, many policymakers have indicated that they would be "patient" about further tightening. Others will see the change of course as evidence of the Fed succumbing to political pressure.

This year, President Trump will have the opportunity to fill 2 vacancies on the Fed's 7-member board.

"The very dovish tone from the Fed is clearly supportive to risk", an economist at Fidelity International said.

The stock market has staged a solid rebound this month off of the December lows. And by indicating flexibility on the runoff in its balance sheet, the Fed implicitly acknowledged the impact the reduction of its government securities' holdings was having on the private credit and equity markets, and by extension, on the economy. Paired with the current volatile geopolitical landscape, investors interest has returned to the yellow metal as they are seeking it out as a safe haven in the markets.

On Wednesday, the central bank said it's ready to use all its tools - including an adjustment to its bond portfolio - if it decided the economy needed more support. Now, many analysts think that's off the table. That convinced markets even more that this year we are going to see less interest rate increases.

In afternoon trading, the dollar fell 0.2 percent against the yen to 108.81 after earlier falling to a two-week low of 108.51.

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