Fidelity: The Fed has blinked
By Anna Stupnytska, Global Economist at Fidelity Worldwide Investment, comments on the FOMC meeting.
While ‘patient’ was dropped at the March FOMC meeting as widely anticipated, the Fed’s statement and press conference were clearly on the dovish side. For me, two important messages stood out.
Firstly, the Fed explicitly acknowledged the effects of a stronger dollar on growth and inflation, implying that all the positive forces driving the economy, including a potential boost to consumption coming from lower energy prices, are perhaps not going to be sufficient to offset the negative dollar drag at this point and beyond, had the dollar rally continued.
The second interesting change was a downward revision to the long-term unemployment rate projection (a proxy for NAIRU) to 5.0-5.2%, implying labour market slack remains. This in turn means that inflation and wage growth—and hence rates—can stay lower for longer.
With the Fed’s emphasis on data dependency, from now on investors should focus squarely on just that—the data. It seems the Fed continues to believe that costs of hiking too early and too fast are clearly higher than costs of being behind the curve and moving slower—and I concur with this view.