The Fed Turns Dovish – The Dollar Comes Down

The Federal Reserve is starting to acclimate to the global economic woes and released a dovish statement – relative to the Fed of course – for the first time in months. The Fed didn’t change its policy and mostly addressed the concerns over the global economy.

So the main takeaway from the recent FOMC meeting was the Fed’s revised outlook of the dot plot to suggest FOMC members expect only two hikes this year and not 4 as previously indicated in the last dot plot release in December 2015. Last time the median cash rate for 2016 suggested four hikes – which didn’t fool the market as the market priced in two hikes at the most. And currently, based on the implied probabilities in the bonds market, the market estimates the Fed’s fund rate will reach 0.64% by the end of 2016 – barely a single hike this year. But keep in mind the Fed doesn’t want to surprise the market by raising rates more or sooner than expected (remember the taper tantrum of 2013 or Yellen’s comment in early 2015 about the timing of raising rates). So that’s why the Fed still leave the option of raising rates twice this year. But the more likely scenario is that the Fed, as the market predicts, raises rates only once. And if the current market conditions continue throughout the rest of the year, I won’t be surprised to see the Fed not even raising rates once.

What’s next?

The Fed is adjusting to the current market conditions and the fact that other major central banks are slashing rates of even augmenting QE program — as is the case for the ECB. This could be the Fed’s way to slowdown the recovery of the USD, which has actually devalued against the Euro and Yen this year, up to date.  So bottom line: Don’t expect any more rates this year, unless the U.S. economy starts to really heat up, which, for now, doesn’t seem likely.

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