Fed sent a more dovish than expected -  Danske

Yesterday, the Federal Reserve left, as expected, monetary policy unchanged. According to analysts from Danske Bank, the message from the FOMC was more dovish than expected.

Key Quotes:

“As expected the FOMC maintained the Fed funds target range at 0.25%-0.50%. This was widely expected, hence focus was on the statement, updated economic projections (mostly the so-called ‘dots’) and Yellen’s press conference. Overall, we think the Fed sent a more dovish message than we had expected although Fed confirmed it is in a ‘wait and see’ mode and thus we stick to our view that Fed will hike in September but stress that risks are skewed towards a later hike.”

“The reason is that we need a rebound in employment growth in the coming months (while other data also meet expectations) and for the UK to vote to remain in the EU. We still expect three hikes next year.”

“As expected, the median ‘dot’ for this year was unchanged thus still signalling two hikes this year. However, this hides that most individual ‘dots’ have been lowered (see chart next page for a comparison) which is clear from the mean dot which was lowered from 2.59% in March to 1.82% in April. In this connection it is important to note that we think most voting FOMC members have a dovish-to-neutral stance on monetary policy meaning they would rather postpone the second hike than tighten too much, too quickly.”

“The markets clearly do not believe in the ‘dots’: There is around a one-third probability of a hike in September and only a fifty-fifty chance of a hike by the end of this year.”