Derek Halpenny. European Head of GMR at MUFG, suggests that they are astonished by the tone of Fed Chair Yellen’s press conference last night and find it extremely difficult to couple her very dovish synopsis of the US economy and inflation with the flow of economic data since the last set of forecasts were released in December and since the last FOMC meeting in January. Key Quotes “Besides the press conference, the key for the financial markets was of course the 50bp cut to the fed funds median DOTS profile for both 2016 and 2017. While there has been volatility since the last DOTS were published in December, Chair Yellen failed to provide any clear explanation for the dramatic cut. Indeed, Chair Yellen’s second line in her press conference was that the FOMC’s “baseline expectations for economic activity, the labour market and inflation have not changed much since December”. We would argue that there was certainly enough evidence to be reassured that progress toward the dual mandate was accelerating. Since the December meeting to yesterday, the S&P 500 was a mere 1.3% lower, NYMEX crude oil was 3% higher and the dollar (Fed’ Major Currency index) was 3% lower to last Friday’s close. Furthermore, the core PCE price index has jumped from 1.3% since the December FOMC to 1.7%. Given the FOMC upgraded the importance of “actual” inflation readings when they hiked in December, this alone should have been a key development. But Chair Yellen seemed to completely disregard it. In fact she made reference to “transitory” upside elements at play. But prior to yesterday, Chair Yellen had spoken of “transitory” downside elements (oil & the US dollar) as acting to keep inflation lower. And of course given the recent weakness of the dollar and the 40% surge in crude oil, fears of those “transitory” downside pressures receding should surely be increasing. But no, in fact, the FOMC projections show a downward revision to annual core PCE from 1.9% to 1.8% next year and the range for 2016 was lowered from 1.5%-1.7% to 1.4%-1.7%. Yes, this may be explained by the lower GDP profile with the 2016 GDP projection lowered from 2.4% to 2.2% and 2017 from 2.2% to 2.1%. But past years clearly indicate that unemployment is falling and inflation is rising with even lower growth rates (1.9% in 2015). Let’s not forget here – the services, ex-energy annual CPI rate is at 3.1% and has increased for nine (yes, nine) consecutive months – to talk of upward inflation pressures as being “transitory” is absurd. We are going to have to lower our dollar forecasts. Our current forecasts were based on two rate hikes – in June and December – but it is the complete disregard to the facts and the effective abandonment of being “data-dependent” that leaves the dollar vulnerable over the coming months to further falls in real yields. As one reporter asked last night – if the data and financial market movements over the last six weeks or so are enough to lower the rate profile so dramatically, what exactly would it take to shift the profile back the other way? The hurdle for that to happen appears very high this morning after listening to Chair Yellen last night. Appetite for dollar buying is likely to be very muted in the aftermath of this meeting. US short-term yields have plunged – the 2-year UST bond yield by 15bps – and that alone will considerably limit upside pressure on the dollar.” For more information, read our latest forex news.