The US Federal Reserve surprised markets at its FOMC meeting on March 16 when it took a much more dovish stance than what most traders had been expecting. Although a downgrade of the Fed’s projections on the US economy and its dot plot guidance of the fed funds rate had been expected, markets were taken aback by the overcautious tone of the FOMC statement.
In the Fed Chair’s press conference, Janet Yellen downplayed the significance of the recent spike in US consumer prices and appeared more concerned about the downside risks to the US economy from global headwinds. Ironically, market indicators such as inflation-linked bonds have recently started to point to rising markets expectations that inflation has started to accelerate. The US dollar declined sharply after the meeting to drop to its lowest since October 2015 when rate hike expectations had been pushed back following the market rout in the summer of 2015.
However, several Fed officials have since the last meeting have adopted a hawkish outlook, putting the prospect of an April or June rate hike back on the table. The dollar has gained sharply this week as no fewer than six Fed policymakers have spoken in favour of at least two rate hikes this year. This contrasts with market expectations of just one increase this year. The greenback has rebounded from a 17-month low of 110.66 yen it touched on March 17 to around 112.65 yen on Wednesday. The euro has also gained against the dollar since the March meeting despite the ECB’s latest round of fresh stimulus measures announced earlier in the month. But the single currency has retreated from a high of 1.1342 dollars to around the 1.12 level as the dollar bulls have come back into play.
The first to speak after the FOMC meeting was St. Louis Fed President James Bullard on March 18. A known hawk, Bullard pointed that “inflation net of the oil price shock is reasonably close to target” and that it would be “prudent” for rates to go up. Starting the round of speeches this week on Monday was Richmond Fed President Jeffrey Lacker who also expressed confidence that inflation is on course to rise to the 2% target. Atlanta Fed President Dennis Lockhart, who also spoke on Monday and is known to be a moderate, went a step further and implied that rates could go up as early as April as there is “sufficient momentum” in the economy. The possibility of an April rate hike was repeated by San Francisco Fed President John Williams.
The next to speak was Chicago Fed President, Charles Evans, who on Tuesday broke away from his usual dovish stance to clearly state that he foresees two rate hikes this year. But the most hawkish view came from Philadelphia Fed President Patrick Harker who suggested he would be happy to see more than two rate increases in 2016. Harker said the US economy has proven resilient to the headwinds and that there is a “strong case” to continue to raise rates.
Harker shed some interesting light on the differing views within the FOMC, indicating that the main disagreement is on the growth outlook for the US economy. Yellen had similarly said in her press conference that the committee members could not agree on the phrasing of the balance of risks to the economy to include within the statement, which is why it was left out. Although some of the recent speakers are not voting committee members this year, their tone is a sign of a growing number of hawks within the Fed. This suggests the next FOMC meeting on April 26-27 could be a closer call than the one dissent seen at the March meeting, even if rates are kept on hold.
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