RELEASE THE DOVES
Central banks remain the dominant story for the market as surprise dovish actions continue to frame most of the markets discussion. We will add South Korea, Thailand and Sweden to the rate cut bandwagon, which totals 23 by our count. Not all central banks have moved in the same direction, but hikes are few and far between and even no action, as in the case of Turkey and Indonesia this week, is viewed as just a temporary pause in the process. Hence, the Fed’s action of signaling the impending rate hikes continues to stand out in the crowd. Today’s message from the FOMC was within this context as they removed the “patient” term from the policy statement, marking the end of six years of forward guidance. Instead, the FOMC will now move to a meeting to meeting approach with regard to rate hikes, with the caveat that April will not be included in that formula. Of course, since no one expected April, this was effectively an empty statement used to show that the Fed is trying to remain on message, but in reality has reservations on its ability to actually raise rates quickly and aggressively. The initial thought that removing patient would signal a more hawkish position from the Fed is, and was, incorrect in our view, as we felt that their view on economic projections was more important. On this front, the Fed downgraded its GDP expectations for 2015, 2016 and 2017, while inflation expectations were also lowered for 2015 and 2016. As the table below indicates, economic growth was lowered to 2.5% in both 2015 and 2016, while core PCE is expected to remain below 2% through at least 2016. The path for Fed funds was also lowered, with 2015 expectations falling to 75 bps from 1.15%, while the expectation for the 2016 funds rate fell to 2% from 2.5%. If we delve a little more into these figures, one has to question the timing of any hike in 2015, which will move those expecting a June hike to move into September, while those expecting a fall liftoff may well start to look into 2016. Additionally, we view inconsistencies in the Fed’s belief that it can raise rates in 2015 when its 2016 year-end inflation expectations stand at just 1.7%. We suspect that the market will need to digest these tid-bits for the next few days, but it certainly takes the sheen off of the straight line march to a stronger dollar and parity on the Euro.