The FOMC proved to be surprisingly dovish in their latest monetary statement. Although the median projection of rates remained between 0.5% to 0.75%, the most hawkish of estimates fell to 0.875% from 1.625% in March. Whereas four officials in March had the confidence to believe that rates should end above 1% in 2015, in June’s edition all officials felt that rates should end the year below 1%. Couple this with toned down economic projections, the Fed appears sufficiently and unambiguously dovish.
No change to median projection of end-2015 interest rates (0.5% to 0.75%) (current: 0.25%).
Two officials felt that the rate hike should only take place in 2016 (no change from March).
The most hawkish FOMC official feels rates should end 2015 below 1%. In March, the most hawkish estimate was 1.675%.
Interest rate projections for the long-run (2016 and beyond) have all been tuned down as well.
2015 GDP forecast revised downwards to 1.9% from 2.5%.
2015 unemployment rate revised higher to 5.25% from 5.1% - could be due to higher labour force participation rate though.
No change to inflation estimates. and No dissent from any FOMC voting members.
What This Means
We see no reason to deviate away from our forecast of a first rate hike in September.
Overall decline in the “dot plots” suggest that the FOMC has become more dovish – which explains the dollar’s lost strength across the FOMC session.
September now looks like the time for the first rate hike, although I won’t generally rule out December.
The tough economic environment means we expect the Fed to conduct only one rate hike this year; two, at most.
By the looks of it, the era of easy money looks to have been given extended life support – don’t expect it to end anytime soon.
Expected Market Reactions
Markets were generally volatile, with the dollar market reacting one of the heaviest.
Gold rose on a dovish Fed, but otherwise is still moving within its recent range-bound trajectory.
Equities rose but not by much – long upper and lower candle-wicks on charts suggest indecisiveness in the markets.
Expect the dollar to lose some strength in the coming days and possibly weeks.
Gold may possibly run back up to $1,200.
Soruce: PFPL
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