No hikes expected in 2019
The Fed revised down its growth forecasts modestly for 2019 and 2020, reflecting the recent loss of economic momentum as well as its own shift in rhetoric. The path of unemployment has also been revised up, with the unemployment rate expected to rise over the forecast period.
The updated ‘dots’ plot reinforces the dovish stance, with no more hikes expected in 2019 and only one in 2020. This is still more than the market is pricing in; no Federal Open Market Committee (FOMC) participant expects a rate cut over the forecast horizon. In addition, the FOMC announced that balance sheet runoff will end in September, earlier than overall market expectations. Chairman Powell emphasised that the economic outlook remains favourable, with the main risks being external, including the global slowdown, trade uncertainty and Brexit. At the same time, the FOMC believes that current data does not point to a policy move in either direction, reinforcing the need to be patient.
Little room to move
While these changes solidify the outlook for a continued pause in the tightening cycle, they do not leave the Fed with much room to manoeuvre should data surprise on the upside as the year unfolds. The dovish pivot may soon come back to bite them. Given first-quarter data distortions which bias activity data to the downside, it will take a bit longer for better clarity on economic momentum to emerge.
We are likely to see a bounce in activity indicators through the second quarter, pointing to some acceleration after the disappointing start to the year. The combination of easier financial conditions, continued tightening in the labour market and some improvement in growth and inflation later this year could necessitate another policy pivot, putting the Fed back on the policy normalisation trajectory. Resumption of the hiking cycle - either towards the end of this year or in 2020 - remains my base case for now. Given current pricing, markets would be vulnerable in that scenario. In the meantime, with the ‘Powell put’ firmly in place, we seem to be back in full risk-on mode.
What question should we tackle next?
Email your suggestion email@example.com
The value of investments and the income from them can go down as well as up so you may get back less than you invest. Past performance is not a reliable indicator of future results.
These materials are provided for information purposes only and are intended only for the person or entity to which it is sent. These materials do not constitute a distribution, an offer or solicitation to engage the investment management services of Fidelity, or an offer to buy or sell or the solicitation of any offer to buy or sell any securities or investment product. Fidelity makes no representations that the contents are appropriate for use in all locations or that the transactions or services discussed are available or appropriate for sale or use in all jurisdictions or countries or by all investors or counterparties.
Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. They are valid only as of the date indicated and are subject to change without notice.
This material was created by Fidelity International. It must not be reproduced or circulated to any other party without prior permission of Fidelity. This communication is not directed at, and must not be acted on by persons inside the United States and is otherwise only directed at persons residing in jurisdictions where the relevant funds are authorised for distribution or where no such authorisation is required.
Fidelity is not authorised to manage or distribute investment funds or products in, or to provide investment management or advisory services to persons resident in, mainland China. All persons and entities accessing the information do so on their own initiative and are responsible for compliance with applicable local laws and regulations and should consult their professional advisers.
This content may contain materials from third-parties which are supplied by companies that are not affiliated with any Fidelity entity (Third-Party Content). Fidelity has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content.
Fidelity International refers to the group of companies which form the global investment management organisation that provides products and services in designated jurisdictions outside of North America Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. Fidelity only offers information on products and services and does not provide investment advice personal recommendations based on individual circumstances.
Issued in Europe: Issued by FIL Investments International (FCA registered number 122170) a firm authorised and regulated by the Financial Conduct Authority, FIL (Luxembourg) S.A., authorised and supervised by the CSSF (Commission de Surveillance du Secteur Financier) and FIL Investment Switzerland AG, authorised and supervised by the Swiss Financial Market Supervisory Authority FINMA. For German wholesale clients issued by FIL Investment Services GmbH, Kastanienhöhe 1, 61476 Kronberg im Taunus. For German institutional clients issued by FIL Investments International – Niederlassung Frankfurt.
In Hong Kong, this content is issued by FIL Investment Management (Hong Kong) Limited and it has not been reviewed by the Securities and Future Commission.
FIL Investment Management (Singapore) Limited (Co. Reg. No: 199006300E) is the legal representative of Fidelity International in Singapore. FIL Asset Management (Korea) Limited is the legal representative of Fidelity International in Korea.
In Taiwan, independently operated by FIL Securities (Taiwan ) Limited, 11F, 68 Zhongxiao East Road, Section 5, Xinyi Dist., Taipei City, Taiwan 11065, R.O.C. Customer Service Number: 0800-00-9911#2.
Issued in Australia by Fidelity Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”). This material has not been prepared specifically for Australian investors and may contain information which is not prepared in accordance with Australian law.