Updates to the Fed’s Outlook

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The FOMC just concluded its March meeting, and surprised the market by dropping its "dot plot" from two hikes in 2019 down to no hikes, and from two hikes in 2020 to one hike (Exhibit 1). The FOMC kept its projections for no change to rates in 2021 and the longer-term "neutral" rate at 2.75%. This reduction was a hike less than the market consensus anticipated. 

The FOMC just concluded its March meeting, and surprised the market by dropping its "dot plot" from two hikes in 2019 down to no hikes, and from two hikes in 2020 to one hike (Exhibit 1). The FOMC kept its projections for no change to rates in 2021 and the longer-term "neutral" rate at 2.75%. This reduction was a hike less.

Additionally, the Committee announced it will end its balance sheet runoff by September of this year, while allowing mortgage-backed securities to continue to runoff (implying net purchases of Treasuries). While this was our base forecast, it appears to be a bit quicker than the market expected; also adding to the perceived dovishness of this meeting.

Treasuries have reacted by the belly and front-end rallying strongly, with the 30-year lagging the rest of the curve. Equities also like the news, as the Fed appears ready to bring the punch bowl back to the party.

It's worth noting that the Fed intends to remain data-dependent, with Brexit and China trade negotiation outcomes expected to be the primary drivers of volatility over the next three to nine months. However, we view the market reaction to the outcome of the FOMC meeting as logical and reasonable given the additional "patience" the Committee is portraying.

Exhibit 1: The Fed's new dot plot

Source: US Department of the Treasury. As of March 20, 2019. Note: Each shaded circle indicates the value (rounded to the nearest 1/8 percentage point) of an individual participant's judgment of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run. One participant did not submit longer-run projections for the federal funds rate.

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Calvin Norris, CFA

About Calvin Norris, CFA

Calvin Norris, CFA, is a rates strategist responsible for guiding the firm's interest rate strategy. He is also a portfolio manager responsible for the overall strategy, portfolio management and trading of money market, short-term cash, ultra short duration, government bond and US Treasury Strips portfolios.