The most notable reaction to the FOMC statement was the instant kneejerk plunge in the USD, as noted moments ago, widely attributed to the Fed’s elimination of the entire sentence that “the economic outlook has strengthened in recent months” despite what was clearly a hawkish take on inflation and the Fed’s hint it is willing to overshoot on inflation (the whole “symmetric” thing).
However, according to CIBC economist Royce Mendes, the dollar plunge, at least until the reversal, was due to the Fed’s “lack of commitment” to a rate hike, noting that Fed officials did little to “forewarn that a rate hike was imminent in June.” according to CIBC Capital Markets economist Royce Mendes.
“The lack of any firm commitment to a near-term rate hike has so far seen yields move lower and the dollar depreciate.”
The analyst further added that while PCE may run hotter than 2% over the course of 2018,”policymakers appear to be trying to tamp down expectations that such a run would warrant a materially faster pace of rate hikes.”
That, or the Fed has simply seen that market implied odds of a June rate hike at now 100%, so it won’t come as a surprise when it does hike next month.
Here are some other reactions:
BMO’s Aaron Kohli, on the addition of “symmetric”
“One of the only changes to the statement focused on the addition of symmetric to the inflation target. Our first read of the additional language around this was that it was meant to emphasize that the slight overshoot in inflation that is expected in the coming months shouldn’t be over-read by the market. The notion that inflation will ‘run near’ this level also offers them an escape clause if inflation undershoots by a bit. The Fed took pains to avoid giving the market too much new information and they mostly succeeded. The ensuing rally in USTs is likely due to the passage of event risk and the market setting up for a hawkish Fed rather than anything materially dovish or hawkish from the statement itself.”
Renaissance Macro’s Neil Dutta, also on the addition of “symmetric” and why it’s dovish:
The only things of significance are the addition of “symmetric” and taking out the reference to monitoring inflation developments. This suggests they’re not overly worried about upside or downside risks to inflation in the near term, so I think it’s dovish.
Bloomberg chief economist, Carl Ricadonna underscores that “policy makers are going to be resistant to altering the path of interest rates as inflation begins to overshoot”, i.e. “symmetric”
“The FOMC was stingy with its upgrade of the inflation assessment, hinting that policy makers are going to be resistant to altering the path of interest rates as inflation begins to overshoot their objective later this year. The Jay Powell Fed is inclined to hold the course.”
Of course, if the market reverses in the next 30 minutes when it undoes the initial kneejerk reaction, expect opinions to likewise pull a 180.
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