Fed Converging with the Market

The Federal Reserve concluded its March meeting last Wednesday and, as expected, the committee elected to keep the policy rate unchanged. More surprising to the market was the degree to which the heavily followed projection for the path of the policy rate, also known as the dot plot, changed versus the December meeting. The median forecast for the end of 2016 declined to 0.9% from 1.4%, while 2017 was revised to 1.9% from 2.4% and 2018 to 3% from 3.3%. The rest of the statement was generally cautious, but had no significant changes. Nor did it contain any particularly hawkish sentiment to offset the dovish nature of the updated projections. The Fed cited global financial and economic conditions as an ongoing risk, but also noted that the economy has nonetheless continued to post moderate economic growth. Economic data has come in with a mildly softer skew recently, and as such the Atlanta Fed’s GDPNow tracker for 2Q16 has fallen from a high of just over 2.5% in mid-February to 1.9% this week. On the inflation front, core CPI has firmed recently, but the Fed’s preferred PCE measure remains under 2% for both the core and headline data. The bond market rallied after the statement release, with a slight bull steepening bias. In addition, stocks rallied and the dollar declined. In our view, this is merely the Fed catching up to the market in terms of the outlook, and confirmation that a slower pace of stimulus removal has unsurprisingly been supportive of risk assets. Ultimately, this update does not change our outlook for growth, inflation or Fed policy, though we will continue to monitor incoming data for any signs of material change.

Sources: CRT, Bloomberg, Atlanta Fed