Tags: fed | rate | hike | bets | odds | cut

Fed's Message Leaves Rate-Hike Bets Hanging, Raises Odds of Cut

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Wednesday, 30 January 2019 05:36 PM

Federal Reserve Chairman Jerome Powell’s first post-meeting press conference of 2019 left market expectations for a rate hike this year hanging by a thread, and raised the chances of a cut in 2020.

A move to tighten policy in March was already seen as a long shot, but the Fed’s tone on Wednesday cast doubt on the prospects of interest rates heading higher at all this year, after nine hikes since 2015.

A stronger focus on risks to the global outlook and emphasis on tighter financial conditions in the Fed statement and Powell’s comments drove U.S. equities higher and pushed two- and five-year Treasury yields to the lowest since mid-January. With shorter maturities leading gains, the yield curve steepened. The 5- to 30-year gap reached about 57 basis points, the widest since February.

“The market is very aggressively discounting any positive outcomes this year,” in areas such as domestic growth, trade and the global economy, said Ed Al-Hussainy, a senior interest-rate strategist at Columbia Threadneedle.

That said, Wednesday’s tone on both the policy rate and balance sheet is significant, he said.

“The language and the markers they put down all point to a very elevated probability that the December hike was the last hike in the cycle.”

Market watchers were surprised by the Fed’s latest signals on its balance-sheet unwind, which suggests it’s closer to completion than previously expected. For traders, the central bank’s line that it’s “prepared to adjust any of the details for completing balance sheet normalization” confirmed a shift in a policy unwind that’s roiled markets.

“I am recovering from monetary-policy whiplash,” Omair Sharif, an economist at Societe Generale, wrote. “The bar for hiking rates even once in 2019 is extremely high.”

Rates traders cut what little positioning remained for a hike in 2019, and are gaining confidence in a 2020 easing of policy.

Capital Economics senior economist Michael Pearce still expects one more hike from the Fed in the first half of 2019, based on solid economic data and easier financial conditions.

“But we would place far more emphasis on our forecast for a sharp slowdown in economic growth further ahead, which we expect will force the Fed to cut rates by 75bp in 2020,” he noted in a report after Powell’s press conference.

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Federal Reserve Chairman Jerome Powell's first post-meeting press conference of 2019 left market expectations for a rate hike this year hanging by a thread, and raised the chances of a cut in 2020.
fed, rate, hike, bets, odds, cut
Wednesday, 30 January 2019 05:36 PM
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