The Fed completed its retreat from hiking rates for the foreseeable future, with a very dovish policy rate forecast at this week’s FOMC meeting. However, even this shift was not seen as enough to satisfy bond investors, as the forward markets have jumped ahead of the Fed and are discounting lower rates over the next 12-18 months. We view this move as not only premature, but likely to be reversed later this year.
– The Fed will need clearly stronger economic data to resume lifting its policy rate.
– That said, our economic outlook remains consistent with further rate hikes.
– In fact, the recent dovish policy turn has increased the odds of a positive economic outcome.
– The implication is that the Fed’s policy normalization has only been delayed, and is not over for the cycle.