Dovish Fed Doesn't Guarantee New Bull Market


The US Federal Reserve does not expect to raise interest rates for the rest of 2019 amid slower economic growth. "Now, Wall Street or at least the market for interest rate futures, is beginning to think the central bank may be cutting interest rates by the end of the year ..." President Trump has criticised the Fed for rate rises it has already made, and he won't like it any more if they resume.

Rates are now seen peaking at 2.6 percent, sometime in 2020, roughly a percentage point lower than the historic average for the fed funds rate and a sign that the US economy has entered a more sluggish era. The Fed expects only 1.9 percent growth in 2020 and only one interest rate increase.

The Fed also said it would ease back on its sell-off of its bond holdings by lowering its monthly cap from $US30 billion to $US15 billion. The Fed envisions no change in interest rates until sometime in 2020, and not at all if the economy weakens further.

"It may be some time before the outlook for jobs and inflation calls clearly for a change in policy", Mr Powell said at a press conference at the end of the Fed's two-day policy meeting.

"Patient means that we see no need to rush to judgment", Powell said.

The rate is used as a key for determining interest on most adjustable-rate consumer debt, such as credit cards and mortgages, and has a direct effect on central bank monetary policy around the world, including in the UAE and most GCC countries, where interest rate changes are dependent on the Fed as most Gulf currencies are pegged to the USA dollar.

The Fed announced that it was keeping its benchmark rate - which can influence everything from mortgages to credit cards to home equity lines of credit - in a range of 2.25 percent to 2.5 percent.

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Powell, for his part, has resisted criticizing the president and has repeatedly asserted the Fed's independence from the Trump administration.

It is a situation that poses risks to the Fed's credibility, given the long-running failure to lift inflation to a target first specified in 2012 in hopes of guiding the economy upward. Indeed, Powell went out of his way to be positive about the US outlook, repeating several times that the economy is in "a good place" and stating that the underlying growth fundamentals are very "favorable". He said yesterday that his change of plan is due to lower than expected growth in the United States economy.

"What we are seeing is the market positioning for potentially a more dovish tone tomorrow", said Minh Trang, senior currency trader at California's Silicon Valley Bank, speaking about expectations of what the Fed's statement will be like on Wednesday. "We should remain patient and let the situation clarify over time; when the time comes, we will act appropriately".

The dovish Fed triggered a steep plunge in U.S. Treasury yields, helping to make the U.S. Dollar a less-attractive investment while increasing demand for dollar-denominated gold.

The Fed's swerve saw the dollar fall against a basket of currencies on Wednesday. At that meeting, the Fed approved a fourth rate hike for 2018 and projected two additional rate increases in 2019. It says traders now put the probability of any Fed rate hike this year at just 1 percent and project a roughly one-in-four chance that the Fed will actually cut rates by year's end to help prevent a slowing economy from toppling into a recession.

The 30-year bond last rose 1-4/32 in price to yield 2.9698 percent, from 3.026 percent late on Tuesday.