The Fed left its dot plot unchanged and revised down its growth forecasts while revising up its inflation forecasts. But Fed Chair Jerome Powell said that he still saw room for rate cuts given that the effect of tariffs on inflation will be transitory. He also said the probability of recession was not high.
These soothing words helped boost sentiment in Asia, and at the time of writing a majority of Asian bourses were trading higher, as were S&P 500 futures. The JPY and CHF were the outperforming G10 currencies during the Asian session on the back of lower UST yields. Despite an upside surprise in NZ GDP, the NZD was the underperforming currency alongside the AUD. Weak Australian labour market data dragged the NZD lower.
As expected, the Fed left its policy rates unchanged in March while it signalled it could slow down its balance sheet run-off into the summer months. While the long- term Fed median dot plot remained little changed as well, it signalled diminishing support for two rate cuts this year. The updated SEP saw the biggest adjustment, with the Fed staffers lowering their growth projections while bumping up their inflation forecasts.
The stagflationary mix of sluggish growth and sticky inflation was highlighted by Fed Chair Jerome Powell as the main reason why the FOMC is in no hurry to cut anytime soon. Even so, additional comments by the Fed Chair suggesting that the FOMC would consider any tariff-induced inflation spike as transitory and that (long- term) inflation expectations are well-anchored were seen as slightly dovish at the margin and thus weighed slightly on US rates and the USD in the immediate aftermath of the policy meeting.
On the day, FX investors will continue to focus on the quality of incoming US data as they try to assess the risk of economic downturn from here. We still think a lot of Fed-related negatives are already in the price of the USD. We also believe that the FOMC would disappoint the rate expectations for 60bp+ cuts this year. This, coupled with evidence that the Trump trade has been unwound by FX investors, could suggest that the recent USD sell-off could slow down in the near term.
