On Wednesday, March 20, the Federal Open Market Committee of the US Federal Reserve delivered their message about the path of monetary policy. Last year, the Fed tightened credit steadily on two levels. The central bank increased the short-term Fed Funds rate a total of four times by twenty-five basis points. The central bank had told markets that rates would rise three times in 2018 in late 2017, but economic growth caused the central bank to add another increase to their agenda. At the end of last year, the short-term rate stood at 2.25 to 2.50 percent.
The program of balance sheet normalization also served to tighten credit further along the yield curve as the central bank allowed debt purchases to roll off their swollen balance sheet after almost a decade of quantitative easing. The March 2019 meeting marketed a shift in the central bank’s policy on four levels.
First, there was no rate hike as they left the Fed Funds metric at 2.25 to 2.50 percent. Second, the FOMC downgraded their projection for economic growth in 2019 to 2.1 percent, a full percentage point below the level the Administration anticipates for this year. Third, the Fed told markets that there would be no further rate hikes in 2019 despite guiding the market to expect two increases in late 2018. Finally, the program of balance sheet normalization will end in September 2019 at a level where the size the balance sheet shrinks from a peak at 25% of GDP or 17% or just above the $3.5 trillion level.
The Fed told markets that they will monitor economic data over the coming weeks and months and that trade issues with China and Brexit continue to pose risks to the economy. However, at his press conference, Chairman Powell told reporters that the central bank had reached an equilibrium level where he currently expects no changes in monetary policy over the next nine months.
Stocks edged lower after the Fed meeting. Uncertainty over trade negotiations together with the inversion of one-to-seven-year interest rates on the yield curve caused banks and financial stocks to experience selling.
Meanwhile, the US dollar index fell sharply following the statement from the central bank. After trading at a high at 97.665 in early March, the nearby dollar index contract settled at 95.201 on Wednesday.
One of the more dramatic moves following the news from the US central bank came from the gold market that rallied as the dollar and interest rates moved to the downside.
As the ten-minute chart highlights, gold jumped from a low at $1298.10 in the leadup to the Fed’s announcement and exploded to a high at $1317.20 in the wake of the dovish news from the central bank. Gold was trading around the $1315 level late in the day, not far off its new short-term peak.
It is likely that we will see follow-through in markets based on the unusually dovish message the Fed delivered at their March meeting on Wednesday. A lower dollar provides bullish fuel for commodities which could push higher over the coming days and weeks now that the doves are soaring at the central bank.