QNB Discusses U.S. Fed's New Dovish Statement in Latest Report

Doha, February 09 (QNA) - QNB said today in its weekly analysis that the U.S. Federal Reserve delivered in its January meeting a dovish message that clearly shed light into the possibility of an early end to the current tightening cycle. The analysis noted that the message came amidst rising downside risks for global growth, muted inflation pressures and inflation expectations, and tighter financial conditions. It has contributed to support the market view that the Fed will pause with its rate hikes in 2019. The report said that the Fed has decided to maintain the target range for the federal fund rate at 2.25% to 2.5%, after nine rate hikes since the start of the tightening cycle in December 2015. The new message signals, according to the report, showed a partial convergence with market expectations and in some ways carries the brunt of the market response to the previous meeting in December 2018. The analysis said there were three key developments in the statement. The first thing the analysis noted was that the updated policy description of the U.S. economic performance has changed somewhat, with carefully selected words and sentences being shifted to express a slightly less benign backdrop. They highlighted the Fed's downgrade of growth from strong’ to solid, in addition to its acknowledgement that inflation has lowered in recent months. The second reason according to the analysis is that the policy outlook section has changed significantly. The Fed completely remove a statement indicating a gradual increase in funds rates completely from its January statement. They also mentioned muted inflation pressures as a reason for their change in view. The third reason is that the revision of the guidance about policy implementation and balance sheet normalization has taken place. The statement has formalized that the Fed intends to conduct policy under the so-called "floor" system of monetary control. This system sees interest on excess reserves as the main operational tool to maintain the federal funds rate within the FOMCs target range. "This means that the FOMC is expecting to keep an ample supply of reserves in the future and therefore will not need to return to the small balance sheets of the past," the analysis added. QNB's weekly analysis concluded by saying that the meeting showed that the Fed has turned significantly more dovish in recent weeks. It added that the Fed is expected to be more cautious and avoid a leading role in shaping expectations. They highlighted that the implied probability of rate hikes in any of the remaining 2019 meetings plummeted from more than 90.0% in October 2018 to less than 6.0% at the time of writing. (QNA)