Richard Franulovich, Research Analyst at Westpac, suggests that yesterday’s FOMC has erred on the dovish side of expectations, the Fed paying short shrift to numerous upside surprises on the economy since their last meeting as well as the easing up in financial conditions while the global concerns remain at the forefront of the Fed’s thinking. Key Quotes • “The infamous dot plot was trimmed back, the FOMC now projecting just two hikes this year, versus four as of their last set of forecasts and four hikes next year (unchanged). With just two hikes projected this year and three more quarter-end meetings still on the calendar before the year is out the math implies that doubts up about a Fed hike in June will inevitably emerge. The implied message is that global economic and financial threats remain a serious concern for the Fed. Had the Fed median 2016 dot plot implied three hikes a June move would have been considered very strong odds for many. Chair Yellen downplayed the projections but the damage was done. • Upside surprises on growth, jobs and inflation since the Fed’s last meeting do not appear to have shifted the Fed’s assessment of the economy or their assessment of the risks, activity still seen expanding at a “moderate pace” and business investment and net exports characterised as “soft”. The Fed admittedly notes, “inflation picked up in recent months” but it is still described as continuing to run below the committee’s objective. The Fed could have conceivably said inflation was closer or “approaching” their objective, given core PCE has jumped to 1.7% and core CPI is now at 2.3%. • The Fed has held back from characterising the risks on activity and the labour market for a second meeting. Recall global ructions saw the Fed drop its “balanced” assessment back in January. Instead the Fed notes that, “global economic and financial developments continue to pose risks”. That if anything sounds more cautious than January’s statement when the Fed merely noted that they were, “closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.” • On the “hawkish” side, George was a dissenter and Chair Yellen noted that April is “live” during the press conference. There are many more dovish leaning signals on balance however and the USD has been hit hard. The USD will struggle near term as markets grapple with diminished odds of a June hike. Today’s more dovish Fed message, coming in the wake of strong dovish signals from the BoJ and the ECB, should underwrite risk assets in coming days, if not weeks. For AUD and NZD that will offset some of the renewed pressure on both that had been building as oil, iron ore and dairy prices rolled over and as the RBNZ and the RBA both tacked in a more dovish direction. • The hope for the USD from here has to be that the complexion of the US data continues to firm to the point that Fed anxiety diminishes. That is not an impossible hurdle either - the strong read for March Fed Empire new orders provides a tentative signal that the fever in manufacturing may be breaking and our US data surprise index is still some distance from hitting peak levels that warn optimism is getting ahead of itself.” For more information, read our latest forex news.