In January the Federal Reserve took a dovish outlook when they signaled for a pause in rate hikes. Since January’s meeting we have seen a mix between positive and negative economic data. Given the mixed data, analysts expect that the Fed will be cautious moving forward. The Fed is expected to revise its dot plot for 2019 from 1 to 2 hikes down to 1 hike during the March meeting. The balance sheet run off is also in focus during this meeting but will most likely not be addressed. The dollar has priced in most of the expected changes to the dot plot but if the fed is overly dovish expect the dollar to take a hit while gold would rally.
January’s Meeting and the Post Meeting Data
During the January Meeting, the Fed took a dovish stance when they signaled a pause in rate hikes for the time being. Powell made comments that patience was needed, and comments that the Federal Reserve’s future decisions would be “data dependent”. Since that meeting, we have seen a mixed bag of data. We saw one strong jobs report in January followed by a weak one in February. February added just 20,000 jobs vs the 180,000 expected. February’s ISM non-manufacturing data came in strong while retail sales, new home sales and manufacturing all came in weaker than expected. With the mixed data coming between meetings, Fed Funds futures show that rates will almost certainly be held steady with only a slight possibility of a rate cut, less than 2%.
Rates Outlook
We will get to see the first dot plot of 2019, which lays out what the policy makers predict for the future of the Fed Funds rate. The dot plot is expected to show lower expectations for future rate hikes following this meeting. Officials have signaled no rate hikes for the first half of the year and have yet to come to a consensus for the second half of 2019. The median dot for 2019 has the rate in the 2.75% – 3.00% range which indicates between 1 and 2 hikes for 2019. Most analysts expect the number of hikes to be revised down to 1 for 2019. A revision down to 0 would leave the Fed less flexibility if the economic situation gets worse. Leaving themselves with 1 rate hike in 2019 allows them to make decisions based on new data.
Balance Sheet
Analysts agree that the Fed will end the roll off of the balance sheet before the end of the year but disagree on the timing of that event. Morgan Stanley believes that process will end in September while Barclays predicts that will happen at the beginning of summer. How the Fed addresses the balance sheet will be one of the more important things to watch in this meeting. Most analyst expect the Fed not to be too specific in this meeting and defer to the next meeting.
Dollar Movement
The dollar took a beating following the unexpected announcement of the Fed to pause the hiking cycle and eliminate future guidance. When other central banks followed the same pattern and paused on rates the US dollar reemerged as the best of the worst, pairing some of those losses. This past week we have seen the dollar dropping as the market is expecting a lowering of the dot plot from 1 to 2 hikes in 2019 to a total of 1 hike for 2019. If we see the dot plot drop to 0 hikes in 2019, we would most likely see the dollar take a seep leg down. This is the less probable outcome but will create aggressive price action should we see the Fed take this dovish stance. Usually we will see the Fed take the slower less aggressive approach as to not shake up the currency and equity markets.
Gold Action
Even though gold has been breaking its inverse correlation with the dollar, I would still expect the inverse correlation to continue around risk events like a Fed meeting. In terms of gold price action, the most important thing to watch will be the Fed’s outlook and the dot plot for the rest of 2019. If we see the Fed getting overly dovish, and revise the dots to 0 hikes in 2019, we could see the dollar take a strong hit while gold would rally. Analysts do expect the Fed to leave one hike on for 2019 and to leave themselves open to be data dependent. This move will likely leave the markets relatively flat as revising the dot plot to one hike for 2019 is the current expectation of the analyst community.