Update: FOMC willing to let the economy rip for now Update: FOMC willing to let the economy rip for now Update: FOMC willing to let the economy rip for now

Update: FOMC willing to let the economy rip for now

Forex 3 minutes to read
John Hardy

Head of FX Strategy

Summary:  The Fed decision today look supportive for risk sentiment and for a weaker US dollar, as the Fed projected much stronger growth this year and higher inflation without raising the median forecast for the timing of the first rate hike, which remains for 2024. This suggests the Fed is more than willing to let the economy run hot for now without reacting with leaning against inflationary pressures.


The Fed decision today initially triggered a USD sell-off and a reduction in rate hike bets from the Fed for 2022 and 2023 as the market interpreted the combination of an almost unchanged FOMC policy statement with some fairly large, and very interesting adjustments in the GDP and especially inflation projections. The “dot plot” of rate projections saw only three more members forecasting liftoff by the end of 2022 (versus only one member in December), and only two additional members, relative to December, predicting one or more rate hikes in 2023 (seven versus five in December). That still leaves the median forecast at no lift-off until 2024 rolls into view.

A few short observations:

  • The statement merely saw the very slightest of upgrades in its observation of the economy: “indicators of economic activity have turned up recently, although the sectors most adversely affected by the pandemic remain weak. Inflation continues to run below 2 percent.”  The January statement noted ”moderated” growth and a more vague statement on inflation being held down.
  • The obviously stale December projection of 2021 GDP growth of 4.2% received a hefty upgrade to 6.5%, while interestingly, the Fed chose to only marginally upgrade the 2022 GDP 0.1% to 3.3% and actually revised down (??) the GDP for 2024 to 2.2% from 2.4%.
  • The PCE inflation projections are a bold bet that inflation could surge for the rest of this year but moderate from there, with 2021 PCE core revised higher to 2.2% from 1.8%, while the 2023 and 2024 projections were only raised 0.1% to 2.0% and 2.1%, respectively.
  • Unemployment rate projections were also lowered – to 4.5% by the end of this year and 3.5% by 2023, versus 5.0% and 3.7%, respectively, previously.
  • The Fed chose to up the maximum amount any single entity could access at the repo window to $80 billion from $30 billion previously, an assist to liquidity at the shortest end of the yield curve, where yields were risking turning negative on a huge wave of liquidity as the US Treasury unwinds its holdings at the Fed to pay for the stimulus.

Conclusion
On balance, the combination of sharply improved projections for the near term course of the economy and inflation and unemployment relative to an unchanged Fed funds policy forecast (median, of course) is quite bullish for risk and bearish for the US dollar, with the only caveat that a significant rise in long US yields in the belief that the Fed and the US government are over-stoking the economy, and lead to extremely high long-term interest rates could create headwinds for interest rate sensitive equities and eventually all risk assets if the move gets disorderly. On that note, the longer end of the US yield curve looks quite stable after posting new highs in yields earlier in the day before the FOMC announcement, while rate hike bets for 2022 and 2023 were pulled back to the middle of the recent range.

Note that all comments above are before any further elucidation at the Fed Chair Powell Press Conference.

There was no mention of the SLR (supplemental leverage ratio) issue, with that rule set to expire at the end of the month, which doesn’t seem to have perturbed markets. (At beginning of presser, Powell said that something would be forthcoming “in coming days"

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 07

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article
  • The rise of populism: Far-right parties will influence the future

    The disheartening cycle of unresolved geopolitical conflicts, the rise of polarizing political parties, and the stagnation of productivity.

    Read article
  • Investing in China: Navigating Q1 amid economic challenges

    Understand China's political landscape in Q4 2023 and the impact on counter-cyclical initiatives, with a focus on the pivotal Q1 2024.

    Read article
Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.