Fed: Connecting the Dots

Fed: Connecting the Dots

The FOMC made a major dovish move; Brexit got a reprieve and the UK has some decisions to make.

“I don’t think we want to become dependent on China as a customer in the long term."
U.S. Agriculture Secretary Sonny Perdue

Fed: Connecting the Dots

As of March 20, the FOMC has turned resolutely and unanimously dovish.

The Fed's consensus forecast for rates – the carefully-watched "dot plot" – now shows no hikes for the rest of 2019 and only one in 2020 – a substantial downward turn from December's map. The forecast for the economy was also pulled back, to 2.1% for this year and 1.9% for 2020, both reduced by 0.1 percentage point. And the schedule for reducing the Fed's holdings of Treasuries and mortgage-backed securities now calls for a halt in September.

Financial markets have reacted in line with the new outlook. In fact, the Fed Funds futures market now[1] trades as if there's a 49% probability of the Fed actually cutting its benchmark rate by December 11, 2019, the date of its last meeting for the year. Yields for 10-year Treasuries have fallen to 2.471%, a low last seen in January 2018 – that's after reaching a high of 3.237% as recently as November 8, 2018. Two- and five-year Treasuries now yield a slightly-inverted 2.288% and 2.280 respectively. In equities, the S&P 500 rose as much as 1.7% to 2860.31 before pulling back slightly at the end of trading on March 21.

Explore insights on the Fed by Western Asset's John Bellows

Brexit and the EU: Terms and timelines, for today

The European Union (EU) gave the UK's Theresa May an extension from the March 29th date on which the UK and the EU were to go their separate ways in a "no-deal" departure. The new arrangement represents a shift by Prime Minister May, and a challenge to pro-Brexit hardliners.

The deal

The UK now has two additional weeks, ending April 12. But the devil is in the details. If UK lawmakers don't endorse her Brexit deal next week, May will have until April 12 to decide whether to leave without an agreement or request a much longer extension and propose clear plans on how the extra time granted would be used.

The leverage

That set of conditions puts political pressure on pro-Brexit hardliners, who will have to choose between backing May's already-negotiated deal or being stuck in the EU for possibly much longer than April 12.

That's because if the twice-defeated deal gets passed, the EU will let the UK stay in the EU until May 22 to wrap things up. But if the agreement is voted down, May will have to decide to ask for a longer extension, perhaps until the end of 2019.

The dates

Why April 12 and May 22? April 12th is the cut-off date for the UK to decide whether it will take part in the elections for the EU's parliament, and May 22 is the last day before voting starts. Voting for its parliament immediately before departing from the EU is viewed by all as worse than pointless; A departure deadline until the end of 2019 would, at the very least, allow for UK representation during that period, if not beyond – depending on the eventual outcome of presumed continued negotiations.

Read Brandywine Global's perspective on the pre-Brexit UK economy


All data:  Source Bloomberg, as of March 22, 2019, unless otherwise specified.

1 Source: Bloomberg, March 22, 2019, 9:30 AM ET




The Federal Open Market Committee (FOMC) is a policy-making body of the Federal Reserve System (Fed), which is responsible for the formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

The Federal Reserve’s dot plot shows the projections of the 12 members of the Federal Open Market Committee (FOMC) on where they think fed funds rate should be at the end of the various calendar years shown, as well as in the long run—the peak for the fed funds rate after the Fed has finished tightening or “normalizing” policy from its current levels. The dot plot is published quarterly.

Mortgage-Backed Security (MBS) is a type of asset-backed security that is secured by a mortgage or collection of mortgages.


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