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US Fed Sees No further Rate Hikes in 2019

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At the March FOMC meeting, the US Federal Reserve left policy rates unchanged and surprised investors by expecting no further rate hikes for 2019 versus two hikes previously. There remains one more rate hike in 2020, while  the “longer run” estimate was left unchanged at 2.75% without defining the time period.

 

Importantly, the Fed announced its plans to slow and end balance sheet rundown by September. The pace of rundown would first slow from $30bn to $15bn from May and end by September, which would leave the balance sheet size at a still elevated $3.5 trillion.

 

Moreover, the Fed would purchase additional US treasury securities (UST) at up to $20bn per month, and allow its mortgage securities portfolio to run down further by the same amount. This would help to offset the expected supply pressure from larger fiscal deficits and keep UST yields better anchored at historically low levels.

 

The Fed also acknowledged a slower growing US economy and revised down its forecast for US growth from 2.3% to 2.1% for 2019, and from 2.0% to 1.9% for 2020.

 

 

Implications of the end to 2019 US rate hikes:

USD Weakness expected - While the USD has been supported by trade tensions in 2018, Citi analysts do not see this performance repeating in 2019. A more dovish Fed and cooling US growth rate points to a peaking USD.

 

EM likely to outperform - If US rates have peaked and other developed markets see limited interest rate pressures, low EM yields and firmer EM currencies are likely to be sustainable. As US equity returns were 3 times higher than EM returns in the last decade, there is a strong case for long-term EM to catch up and outperform.

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