US tightening cycle is now over - Westpac

Sean Callow, analyst at Westpac, suggests that the Fed’s view on the US economy hasn’t actually changed much, discussing labour market strength and economic activity rising at a "solid" rate.

Key Quotes

“There were two vital changes. Firstly, the FOMC dropped their long-held view that “some further gradual increases” in the funds rate were likely and rather now will be patient as they determine future changes.”

“Secondly, the Fed released a separate statement on its balance sheet management (i.e. reducing holdings of bonds bought with printed money after the GFC). At the December meeting, Powell said the plan was to “have the balance sheet run off on automatic pilot.” Now the Fed is “prepared to adjust any of the details” depending on economic and financial developments.”

“Both of these were taken as clear signs by the market that the US tightening cycle is now over. In recent months markets have swung from pricing substantial further rate hikes into 2020 to roughly flat in 2019 and toying with lower rates in 2020. This dovishness underpinned a solid rally in equity markets to end the week, while the US dollar and bond yields shifted lower.”