Mohamed A. El-Erian: Fed Signals No Rate Hikes in 2019, New Approach to Balance Sheet: "The central bank’s guidance on interest rates is more dovish than even the most sanguine bulls had hoped.... Three months ago, the Fed was still signaling several rate hikes this year...
...At the conclusion of its two-day policy meeting Wednesday, it slashed that forecast to none and announced what many would have regarded as an unusually early end to the removal of exceptional liquidity.... The reaction of financial asset prices reflected the view that the Fed gave markets the policy guidance that the most optimistic bulls had hoped for, but few believed that the central bank would deliver....
Historically, a dramatic U-turn in Fed policy like the one solidified on Wednesday would have been prompted by a significant worsening in the economy and its outlook, and/or major financial market dysfunction, particularly given the extent to which the central bank is sacrificing short-term policy optionality. Yet neither factor is at work here.... Other issues could have... played a role.... Concern about the return of... market volatility.... A desire to provide greater insurance... China-U.S. trade negotiations, Brexit and other factors.... A desire to minimize the likelihood of renewed political attacks.... The greater the role played by these concerns, the greater the threat of financial and economic instability down the road, and the higher the risks associated with the Fed’s decision to give up its policy optionality so early in 2019....
#noted
