In another change to the statement, the Fed said inflation on an annual basis is “expected to move up in coming months,” after saying “move up this year” in the January statement. Price gains are still expected to stabilize around the Fed’s 2 percent target over the medium term, the FOMC said.
The central bank’s preferred price gauge rose 1.7 percent in the 12 months through January and officials projected it to rise to 2 percent in 2019 and hit 2.1 percent the following year, the latest estimates showed. The estimates for inflation excluding food and energy, which officials see as a better way to gauge underlying price trends, rose to 2.1 percent in 2019 and 2020 from 2 percent seen in December.
“Job gains have been strong in recent months, and the unemployment rate has stayed low,” the FOMC said. The statement said that household spending and business investment “have moderated” from strong fourth-quarter readings.
A dovish rate hike is what the market was hoping for and that’s what it got which eases concerns that the new Fed chair is anything other than market friendly. There had been some concern that the Fed might raise rates four times this year but that is now looking less likely. However, the upshot of the statement is that four rates hikes in 2019 is a realistic possibility and a significant negative impact would be required to stop the run-off of the balance sheet. Therefore, the outlook is not quite as liquidity friendly as might have appeared on first blush.
Powell’s statements following the FOMC’s meeting was broadly in line with the view that the Fed is attempting to reload the interest rate weapon so they can be deployed during the next recession. Inflation is expected in increase but only moderately. Quite whether that remains the case when oil and gold are ticking upwards is a significant question for traders.
The Dollar was the primary mover on today’s news and that helped to stoke interest in gold which posted a sizeable upward dynamic from the lower side of its range.
Since the financial crisis liquidity provision has played a significant role in asset price inflation. The run-off of the Fed’s balance sheet, while other central banks are examining how to follow suit, represents a headwind to the stock market.
The corrective phase that began in late January remains underway with the Dow Jones Industrials, which had led into the peak, now underperforming. Concurrently, the Philadelphia Semiconductors Index and companies with subscription business models have taken over that leadership position which represents a narrowing of breadth among the market’s outperformers.