When the US Federal Reserve met in March for the second time this year there was an expectation that the FOMC committee might well adopt a fairly hawkish tone in light of recent indications by a series of senior US policymakers that the latest economic data didn’t in anyway preclude the possibility that the Federal Reserve retained the option of a potential four rate rises this year.
There certainly wasn’t an expectation that policymakers would dial back their expectations for rate rises by half in the so called “dot plots” of policymaker forecasts for the rate path direction, given that most of the recent data hadn’t been too bad.
On the basis of these plots at the beginning of the year US policymakers were projecting that US rates would be higher by 1% over the cause of the next 12 month period. This always seemed overly optimistic given the fragility of the US economy, but it has always been thus with the US Federal Reserve.
Bond markets were pricing in a much more gradual tightening cycle with little prospect of a move in March or April, but what the March FOMC meeting did give us was a much more cautious Fed with respect to the international economic environment.
Even allowing for this, the halving of Fed expectations caught markets on the wrong side, pushing the US dollar lower in the process as policymakers acknowledged risks from tighter global financial conditions.
While it is important not to overstate the relevance of the “dot plot” projections given that they are often out of sync of market with market expectations, they can give an insight into how policymakers are thinking.
In recent times though they have become as much use as an overused dartboard, with some suggesting they should be scrapped altogether, which given how slavishly markets follow them, wouldn’t be a bad idea.
Further muddying the waters we have had a succession of Federal Reserve policymakers come out in recent days suggesting a rate rise in April remains a real possibility, which rather begs the question as to why there was so little dissent over the decision to hold rates last month.
Granted, the majority of the speakers after the meeting don't have a vote on the committee this year but the level of hawkishness does jar somewhat with the dovish message delivered at the March meeting. While Fed Chief Janet Yellen did a good job of squashing the hawks back into their places last week, the fact that markets came away with a confused message will have been an unwelcome distraction.
In this context this week’s FOMC minutes could well open up some clarity on where the divisions on the committee are, particularly given that an expansion in the hawkish camp could present problems for Janet Yellen, in the event we see the economic data continue to show significant signs of improvement between now and the end of April.
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