Markets do not believe the Fed

Following the meeting on Wednesday, December 19, the US Federal Reserve announced the next step aimed at normalizing monetary policy, raising interest rates by a quarter percent.

Fed projections look confidently bullish. The GDP growth rates were revised for 2018 from 3.1% to 3.0%, for 2019 from 2.5% to 2.3%, which in fact looks like a small adjustment, but for 2020 the forecast is not changed, at 2.0%, and this the fact that in 2019 is expected to reverse the yield curve and the arrival of a recession. It seems that the Fed wants to inform the markets that there will be no recession, despite the clear signals.

The same story with the other indicators. For 2019, the unemployment forecast is left unchanged at 3.5%, which means that the Fed is not expecting a deterioration next year, but an improvement in the labor market, which indirectly confirms the previous conclusion that the economy should not be cooled. Where such confidence?

The inflation forecast confirms the previous conclusion. Despite the fact that the Fed lowered its forecast for 2019 from 2.0% to 1.9%, the forecast for 2021 remains unchanged, that is, the Fed considers the current price slowdown to be a temporary phenomenon and not having a fundamental basis. In other words, the Fed believes that the slowdown in the real purchasing power of the population will not occur.

At the same time, the yield of 5-year TIPS bonds falls just as collapse, as of December 17, it fell to 1.58%, having lost 0.64% from the May peak. The decline in TIPS yields indicates a real assessment of the prospects for inflation by business, not by consumers, while the business builds its assessment primarily not on expectations, but on fundamental indicators, that is, the business is preparing to lower real incomes of citizens, and not to growth.

And finally, the latest rate forecast. Yes, the Fed lowered the target level somewhat and informed the markets that 2 increases were planned in 2019, and one more in 2020. The revision of the forecast was expected and should not have had a strong impact on the markets, since as early as October the head of the Fed J. Powell informed about the likely decrease in the neutral level.

But if you look at the dynamics of futures at a rate on the CME, you can see the deep pessimism of the players regarding the feasibility of the presented forecasts. The probability that the rate will be raised at least once in the first half of the year is only 37%, and about 42% in December, there is no talk about a second increase. That is, the markets believe that the entire rate forecast is actually a common bluff that the Fed cannot confirm in 2019.

So, the Fed says that the growth rate of the US economy is only slightly slowing down, and the overall trend remains confident. The markets do not react at all to the tightening of monetary conditions, as it might seem, but to the sharply increased probability of a recession and to the fact that the Fed is masking its fears rather awkwardly.

Therefore, the initial reaction of the market, expressed in the strengthening of the dollar, turned out to be short-lived, and on Thursday morning the dollar retreats in all directions. First of all, defensive assets are growing, the yen, the franc, gold, the demand for bonds is growing, the yield on treasures has decreased as a result of trading, and not increased, as one would expect if the rate was raised.

Markets are beginning to prepare for a recession, which is becoming increasingly likely.

Eurozone

The euro reacted to the outcome of the FOMC meeting in sync with the market, rolling back to support 1.2270, but the subsequent reaction put everything in its place. Having overcome two resistances of 1.1440 and 1.1470, EUR / USD came close to the level of 1.15, which can be regarded as a serious request for continued growth. Support has moved to the level of 1.1440, and if Friday reports on orders for durable goods in the United States and the price index for personal consumption are no better than expected, the markets will finally take root in the dollar reversal scenario, which will push the euro higher.

Great Britain

Today, the Bank of England holds the latest monetary policy meeting this year, and the markets do not expect any changes. The currency pair GBP / USD pulled up to the resistance of 1.27, there is a chance of continued growth, if successful, we can talk about the end of a bearish momentum in the long term.