Dow drops more than 100 points amid Fed announcement

Roman Schwartz
March 21, 2019

"They've done the work they needed to do, and at this point we need to put a little pause on it and let the economy catch up to the rising interest rate", he noted.

The Fed also said it would ease back on its sell-off of its bond holdings by lowering its monthly cap from $US30 billion to $US15 billion. The Fed pointed out that inflation for items other than food and energy remains near 2 percent, its target level.

The Fed announced it was keeping its benchmark rate its current range of 2.25 percent to 2.5 percent and trimmed its expectation of two rate hikes this year to none.

The Federal Reserve Bank of Atlanta, meanwhile, projects the US economy will expand at just a 0.4 percent clip in January, February and March, and consumer and producer price indices in recent months haven't shown almost the sort of inflationary pressures that would warrant future rate hikes.

Did the Fed just go terminal (ie is +2.50% the highest Fed Funds of this cycle)?

Fed Chairman Jerome Powell explained the about -face, which he called a "wait and see approach", saying that, while fiscal stimulus boosted the economy in 2018, there had been "data arriving since September suggesting that growth is slowing somewhat more than expected".

The economic projections released on Wednesday showed policymakers at the median see the USA economy growing only 2.1 percent in 2019, a full percentage point below the roughly 3 percent growth that was seen in 2018 and which the Trump administration contends will continue. At the same time, the Fed's balance sheet run down will end in Sep and many did not expect such to happen as soon as that - GDP forecasts were also downgraded. Yields have been falling steadily since November, as worries rose about a slowing global economy and traders subsequently made moves in anticipation of a more patient Fed.

Some market players said investors took money off the table after a report of US concerns that China is pushing back against American demands in trade talks.

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The shift in the closely-watched forecast released meant nine of the 17 members of the policy-setting Federal Open Market Committee lowered their projection for this year.

Nobody expected that and we didn't get one. "It's a great time for us to be patient".

Benchmark U.S. stock market indexes swung higher after the Fed's statement was released, and key Treasury security yields dropped to the lowest since early January. The dollar weakened broadly against major trading partners' currencies.

That stance left investors fretting that the Fed seemed determined to keep tightening policy regardless of a weakening economic outlook, an issue addressed with the lower economic forecasts.

It said: "Recent indicators point to slower growth of household spending and business fixed investment in the first quarter".

At the same time, emerging markets such as India, Turkey and Brazil can claim a small win from the Fed pivot, as the policy stall reduces incentives for investors to shift capital into USA assets.

The CTE Group's FedWatch tool - which projects the odds of a rate hike at any given FOMC meeting in the eyes of analysts, investors and monetary policy spectators - on Wednesday morning indicated there was virtually no chance of a rate increase at the Fed's March meeting.

Inflation for the year is now seen at 1.8 percent, compared to the December forecast of 1.9 percent.

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