The Federal Reserve is either set to throw in the towel on rate hikes in 2019 or signal that it may resume rate hikes later this year. Dovish projections after the Fed meeting Wednesday could provide support to the Dow Jones and broader stock market after a poor start to the day.
While Fed Chairman Jerome Powell has downplayed the usefulness of the Fed policymaker quarterly projections, Wall Street doesn’t have much else to grab onto. The Fed has previously confirmed that it will announce a plan to stop shrinking its balance sheet later this year.
The Dow fell 0.7%, the S&P 500 0.5% and the Nasdaq composite 0.4% in afternoon trading on the stock market today. Word from President Trump that tariffs on Chinese imports could stay in place for a long time weighed on stocks.
Powell is set to weigh in at 2:30 p.m. Eastern Time with a press conference.
Ahead of the Fed meeting, Wall Street economists were divided as to whether Fed policymaker quarterly projections would indicate a prolonged hold on rate hikes or an expectation of one hike later this year. Projections in December, before the Dow Jones and other stock indexes dived close to bear-market territory, had indicated two rate hikes were likely.
Now, even though the stock market has recouped most of its fourth-quarter slide, moderating inflation and a slowdown in economic growth have taken any pressure off the Fed to raise rates. Even the sizzling labor market seems to have cooled a bit, though February’s 20,000 payroll gain dramatically overstated the extent.
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Fed Meeting To End QT
Minutes of the late January Fed meeting, which were released Feb. 20, had already confirmed that quantitative tightening, the shrinking of the Fed balance sheet as securities mature, would end later this year.
QT is the reversal of quantitative-easing asset purchases made to aid recovery from the financial crisis by encouraging risk-taking. By shrinking the pool of safe assets and holding down interest rates, the Fed nudged trillions in private wealth to find alternative investments and seek higher returns.
Quantitative tightening, which began in late 2017, is reversing some of those purchases, gradually reaching a pace of up to $50 billion a month.
Dow Jones Has Priced In Fed Dovishness
The Fed’s abrupt shift from hawkish to dovish in January helped the stock market recover with gusto. Yet Fed policy is no longer a catalyst for stocks. Financial markets are even more dovish than the Fed, seeing about 33% odds of a rate cut within a year. To really move markets, then, the Fed would have to signal it’s open to restarting QE or cutting interest rates.
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