Wow!  That was a surprise.  The Federal Reserve was considerably more dovish than anticipated, suggesting no rate hikes for the remainder of 2019 and only one in 2020.  As early as yesterday morning, the Fed was perhaps suggesting 2 hikes in 2019.  The Committee downgraded growth and unemployment was revised up and the NAIRU (Non accelerating inflation rate of unemployment) estimate was revised down again.

The balance sheet stuff is not a shock stating that in October the Fed will roll its maturing holdings of mortgage back securities into Treasuries.  Three months ago the Fed was selling its portfolio based upon a schedule that was devised over 18 months ago, a course that it altered in January.

To the best of my knowledge no one had suggested this outcome.

Everyone has become a yield curve analyst.  The irony of the immediate reaction to the Fed was a further flattening of the yield curve between the 3 month and 10 year to 8 basis points thus suggesting the odds of an economic contraction have actually increase post FOMC, the inverse of what should have been expected.

Policy makers lowered 2019 growth projections to 2.1% from 2.5%, a full percentage point lower than 2018.  Officials see the unemployment rate at 3.7%, higher than previous estimate of 3.5% and a 1.8% headline inflation rate. Previously the Committee had projected a 2.0% inflation rate.

Yesterday I commented about wage inflation, referencing an accepted benchmark/formula.  The Fed broached this topic by lowering NAIRU but did not mention a rationale for lowering this pivotal benchmark.

Equities initially responded positively under the guise of “bad is good,” ultimately closing mixed.

In my view the Fed has potentially boxed itself into a corner.  The markets were not expecting the above and some can conclude the Committee potentially sees something that most do not see.  Moreover what happens if the “cross currents” subside?  Will the Fed again dramatically change course?  As widely known three months ago the Fed was projecting three rate hikes in 2019.

Last night the foreign markets were mixed.  London was up 0.42%, Paris down 0.20% and Frankfurt down 0.51%.  China was up 0.35%,  Japan up 0.20% and Hang Sang down 0.85%.

The Dow should open moderately lower on growth concerns.   The 10-year is up 5/32 to yield 2.51%.


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