The Fed Rules in the Market’s Favor

Posted February 01, 2019

"Given the renewed weakness for the dollar, if the jobs and wages data were to disappoint expectations badly then this will further reinforce the Fed's cautious outlook on the economy and reduce the possibility of rate increases even further", said Fawad Razaqzada, market analyst at Forex.com in London.

U.S. stocks rallied, Treasury yields fell and the dollar sank as investors digested the new message from the central bank, which marked a broader shift toward sustaining the expansion - rather than preventing any overheating - and follows months of criticism from President Donald Trump for raising rates too much.

By removing references to further rate hikes, the central bank indicated that it's not going to move prematurely on raising interest rates.

As result of the Fed's reversal, stocks extended their rally after the FOMC's statement and Fed Chairman Jerome Powell's press conference Wednesday afternoon, with the major USA averages ending up 1.8%-2.2%.

The FOMC increased the benchmark rate four times previous year but rising concerns about a slowing United States economy, amid a trade war with China, prompted officials to signal they will take time to gauge the economy's performance.

It also said it could alter the pace of its balance sheet reduction "in light of economic and financial developments".

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Investors liked what they heard.

"The case for raising rates has decreased somewhat", Fed chairman Jerome Powell said at a news conference following the rate announcement.

Officials at the USA central bank cited muted inflation and "global economic and financial developments" to explain the shift.

The Fed's policy statement left its overnight benchmark lending rate in a target range of 2.25 percent to 2.5 percent.

"The Fed dropped a commitment to gradual rate hikes from its policy statement".

The downgrade in the Fed's language around rate increases included a change in its description of economic growth from "strong" to "solid", and it noted that market-based measures of inflation compensation have "moved lower in recent months".

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Following the Fed statement, TD Securities has now changed its Fed forecast, TD's senior FX strategist, Mazen Issa, said. He didn't comment on the Fed's actions on Wednesday, but he did tweet "Dow just broke 25,000".

The Nasdaq Composite added 1.31 per cent to 7,277.26.

Market watchers were surprised by the Fed's latest signals on its balance-sheet unwind, which suggests the central bank is closer to completion than previously expected.

The Dow is up nearly 15 percent since its recent trough on December 24.

He also said that ongoing negotiations between the U.S. and its trading partners may weigh on businesses more than the tariffs themselves.

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