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Dovish Rhetoric Shifts US Curve

Posted March 29, 2019 Ashley Chadwick

Since the March meeting of the FOMC, there have been so big moves in the US treasury curve. Chairman Jerome Powell struck a positive but Dovish tone. He claimed that the 'underlying economic fundamentals are still strong.' This was despite Fed forecasts that are predicting slower short term growth and lower inflation. Global risk factors such as trade wars, Brexit and Europe are still present. However, the trade war with China and other countries has calmed recently and other factors would only have a limited impact.

This all led to a shift in the median expectations of the members of the FOMC for future interest rates. They see no hikes in 2019 and just one in 2020, just three months earlier in December they saw the need for three hikes by the end of 2020. This leaves the expected rate at 2.625% rather than 3.125%. This Dovish rhetoric was taken to heart by the markets. Looking at Fed fund rate futures, the markets are predicting that it is more likely the next move by the Fed will be a rate cut rather than a hike. Looking further out along the curve, using Eurodollar futures, the markets are predicting lower inter-bank rates at all points going forward compared to now, until December 2025.

Adding to this pessimism has been a recent downgrade in fourth quarter growth. The original forecast of 2.6% was revised down to 2.2% and the slowdown is expected to continue into 2019. Figures showed lower spending by consumers and governments, as well as a fall in business investment. Whilst there is still growth and the underlying fundamentals still seem to be fairly strong, all it will take is a few more poor data releases or a new shock such as a trade war and the hushed whispers mentioning recession will grow louder. If all this were to happen during the election cycle, there is no telling what new policies might come out from the White House and the impact they would have on the economy.

Picture from Brookings institution, via Flickr