USD flows: Fed projections nuanced, but bolsters dollar
Dots shift, albeit quite as hawkish in composition as they may seem on first look
Show more a strongly divided Fed, and one than can still hold if data cools 'post Iran'
Nonetheless, median and to a lesser extent the breakdown partly valid the market shift
Dollar firms and continues dalliance with return to US exceptionalism
No change today was a given, but the dot projections make quite a strong impression of a strongly divided Fed. If you look merely at the medians then you get this message: shift to imply median expectations for a one-off hike this year (3.8% expectation vs 3.4% previously) to then be reversed in 2027 (3.6% vs 3.1% previously) but staying ‘higher for longer’ versus the neutral rate. As such, a clear embodiment of a modest shift to explicit tightening bias.
However that is quite misleading and over-simplifying.
In terms of the composition, just less than half (9 of the 19) see a hike this year, while 6 of those 9 see more than one hike.
Eight see rates unchanged and one sees a cut.
One policymaker – presumably Warsh who is against such explicit guidance – did not submit a rate view , so that may suggest at least one more is probably at most in favour of no change, and of course an influential voter.
The statement also doesn’t give any forward guidance
Net result is that the dots are probably not as hawkish as they might seem, and it still leaves the Fed able to stay on hold if the data cools, but the projections do at least underscore the shift in bias.
Instance reaction is to US2s to push back towards the recent yield range highs (back into the 4.1-4.2% tops) but funding some capping there. The results don’t go far enough to fully validate what it already priced in to the money market, though the market will extrapolate and so still see it as conformational for now.
Dollar does firm however across the board and it does psychologically play to the current market dalliance with a return to US exceptionalism and potentially more lasting dollar near-term support than just the recent haven bid.
Warsh's press conference still to be seen however and if he doesn't play a poker hand (in keeping with no guidance), he could yet deliver a more dovish or at least less hawkish message, so there's more to be taken on board yet.