Fed Stay On Sidelines As Central Bank Bonanza Continues

WHERE WE STAND – It’s reassuringly normal, this morning, sitting down to write about macro and monetary policy, as opposed to battling through another storm of tariff headlines. Thank you, Mr Powell!

Of course, yesterday was ‘Fed Day’. As expected, the FOMC held the target range for the fed funds rate steady at 4.25% - 4.50%, while also revising higher the near-term inflation profile, and lower near-term growth expectations. These forecast tweaks, though, didn’t move the median dot throughout the forecast horizon, which continues to point to 50bp of cuts both this year and next, and a ‘longer-run’ rate at 3%.

The statement, though, did include an interesting tweak, removing reference to risks around the dual mandate being “roughly in balance”, instead noting that uncertainty around the outlook has “increased”.

Furthermore, the FOMC also – in a surprise move – announced that the pace of balance sheet run-off will slow from the start of next month. QT will continue, though the Treasury redemption cap will be cut to $5bln from the present $25bln, in what Chair Powell framed as a “technical adjustment”. To be frank, I’d argue that you may as well just scrap QT entirely with a cap that low, but the tweak is in any case a bit of a boon for the long-end of the Treasury curve (strengthening my long-standing bullish bias), and perhaps also a nod to the Trump Administration.

It’s interesting, though, that QT is “technical”, and QE is “stimulus” – maybe I’ll knock up some more thoughts on that framing at some stage, especially when the actual liquidity impact is pretty much the same, no matter the Fed’s narrative.

Anyway, besides that, it’s tough to argue that the March FOMC was a game-changer.

Powell stuck to the script at the presser, keeping as much optionality as possible around the outlook, noting that policy is ‘well-positioned’ to wait for greater clarity, and that the Committee need not hurry to adjust the policy stance. The direction of travel for rates remains lower, clearly, though the bar for further cuts remains a relatively high one, with policymakers wanting to not only obtain a greater degree of confidence in the economic outlook, but also see further concrete progress back towards the 2% price target, before taking further steps back to neutral.

On that note, a rant, if I may. It seems folk are always desperate to slap a “hawkish” or a “dovish” label on the FOMC. It’s pointless! Right now, they’re just neutral, and have as little clue or conviction about the economic outlook as anyone else. Hence, they’ll sit on the sidelines until they have greater clarity on exactly how things may pan out. It’s not a tough one to understand, really.

In the aftermath of the FOMC, though, markets reacted in a dovish fashion – stocks gaining ground, Treasuries advancing across the curve, and the dollar rolling over. All of this, though, smacked of participants that had been hedging hawkish policy risk unwinding their positions, as opposed to anything more fundamental, or any significant shifts in the policy outlook.

I remain a rally seller in the equity complex, with both economic and earnings growth expectations still needing to re-rate to the downside, and with the incoherent nature of policymaking from the Oval Office set to continue. Chuck in the absence of a ‘Fed put’, and there being no comfort blanket for the bulls, and the near-term path of least resistance should still lead lower.

These factors are also likely to exert continued pressure on the dollar, while also helping the bull case for Treasuries, where the risk/reward continues to point in favour of further gains, amid those downside economic risks.  

LOOK AHEAD – After the fun of the Fed last night, another busy day awaits.

The central bank bonanza isn’t coming to an end just yet, with the SNB, Riksbank and BoE all set to announce policy today. The SNB should deliver a 25bp cut, to 0.25%, this morning, though that move is likely to be the last of the cycle, as focus shifts to interventions in the CHF, amid desperation to avoid a return to NIRP/ZIRP. At the same time, the Riksbank are likely to hold rates steady, after inflation data recently surprised to the upside.

Later in the day, the BoE should maintain Bank Rate at 4.50%, while reiterating a ‘gradual and careful’ approach to further policy normalisation, amid lingering upside inflation risks, with headline CPI set to rise towards 4% by the summer. Of most interest from the ‘Old Lady’ will be the vote split; my gut feeling is 8-1 in favour of a hold, with Dhingra dissenting in favour of a 25bp cut. That said, external members Mann and/or Taylor could also dissent dovishly, perhaps even for a 50bp cut, as the former two preferred last month. Some knee-jerk pressure on the GBP could come about on a dovish surprise here, but will probably be short-lived, with the MPCs ‘internal’ members all likely to back holding rates steady.

The MPC, importantly, will have had advance sight of this morning’s labour market data before voting on policy last night, as is convention. As such, and considering that the figures remain horrifically skewed by ongoing data quality issues at the ONS, the report isn’t worth paying much attention to.

Elsewhere, today, the US delivers both existing home sales data, and the weekly jobless claims figures, with the initial claims print coinciding with the March NFP survey week. Regional manufacturing figures are also due from the Philly Fed. Besides that, the central bank speaking calendar is busy, with BoC Governor Macklem, and a handful of ECB policymakers, including President Lagarde, due to make remarks.

Lastly, notable earnings today come from the likes of semiconductor name Micron (MU), as well as bellwether stocks such as Nike (NKE) and FedEx (FDX).