A notably dovish Fed meeting has underlined their belief in “better safe than sorry”. Other monetary authorities think this too. But with a range of uncertainties – most immediately Brexit – still unresolved, will markets keep faith?
1. The FOMC clearly wants to indicate it is ready for whatever economic or market problems may lie ahead – like the ECB.
As universally expected, the FOMC meeting this week didn’t shift interest rates. But it did suggest (via its individual members’ expectations) that rate hikes are unlikely in 2019 and the 2019 GDP growth forecast has been reduced (but not long-term growth expectations, as discussed on page 2). The Fed’s balance sheet reduction process will be also slowed in May – and then concluded in September. This slew of policy and forecast shifts proved more accommodative than already very-dovish market expectations and markets, at least initially, liked it. Of course, Fed members’ expectations can change and it is not sensible to completely rule out a future Fed rate hike on this basis – in fact, we continue to expect one more hike over the next 12 months. Parts of the Fed announcement however echoed the ECB’s decisions last week to take rate rises off the table and reinvigorate its targeted long-term refinancing operations (TLTROs) later this year. Both institutions clearly want to signal that they are ready for whatever the global economy or the markets throw at them.
2. Brexit is the immediate problem. We still expect the end-game to find a negotiated solution, but beware complacency.
Brexit could be the most immediate such challenge. Late on Thursday, EU leaders indicated that they were prepared to offer a short extension to May 22, provided that the UK parliament approved the deal on offer; if it does not, the extension is just to April 12. Mrs. May could struggle to get her deal through a reluctant House of, as we discuss on page 3. We still expect a negotiated settlement but a “hard Brexit” remains a possibility, perhaps due to policymakers’ exhaustion: until very recently, markets had seemed remarkably relaxed about the eventual outcome, but this complacency could now come to an end. Central banks’ “better safe than sorry” approach requires markets not to be rattled by gloomy prognostications – because they believe that policymakers can cope. A Brexit misadventure could challenge this belief.
3. The Indian election process is now under way with the result due on May 23. A recent inflation blip is unlikely to unsettle the RBI.
Looking beyond the often divisive Brexit wrangling, it is somehow reassuring to see the world’s greatest democratic exercise – the Indian general election – begin to get underway with polling from April 11 to May 19 and the result announced on May 23. On page 5 we take a first look at the possible investment implications, and consider likely future Reserve Bank of India (RBI) policy after an unexpectedly high inflation figure for February. We will return to this contest in coming weeks.
To download a PDF of the full report, please click here.