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.
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.
The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
CMC Markets Singapore may provide or make available research analysis or reports prepared or issued by entities within the CMC Markets group of companies, located and regulated under the laws in a foreign jurisdictions, in accordance with regulation 32C of the Financial Advisers Regulations. Where such information is issued or promulgated to a person who is not an accredited investor, expert investor or institutional investor, CMC Markets Singapore accepts legal responsibility for the contents of the analysis or report, to the extent required by law. Recipients of such information who are resident in Singapore may contact CMC Markets Singapore on 1800 559 6000 for any matters arising from or in connection with the information.