As I expected the FED statement and the Jay Powell press conference show that the FED is turning neutral with a dovish tone.
As always the FED will be data dependant, but they are evaluating the need to change the ‘balance sheet’ runoff–I assume from the current $50 billion/month rate.
As I read the statement I see a dovish approach to further rate hikes–still with the June possibility, which we had forecast for 2019. We believe they will reduce the balance sheet ‘runoff’ to 1/2 the current rate (in the $25 billion/month range). Additionally I believe they will ultimate target a balance sheet level of $2 trillion. This contrasts with the $1 trillion balance sheet that we started quantitative easing with way back in 2008. The balance sheet topped out at the $4.5 trillion level and now stands around $4 trillion.
So in summary I believe that all the data that is released each month will very much drive the FED funds rate–more so than it already does, so we need to watch employment and inflation closely. Rate hikes will only occur if they are warranted, primarily by inflation. The balance sheet ‘runoff’ will change to a more dovish level.
All of this likely bodes well for investors–both common share owners as well as preferred and baby bond holders. With this dovish tone the 10 year treasury, which was up 2 basis points to 2.73% earlier today, is now falling and is off 1.3 basis points at 2.699% as we had surmised would happen.
With this now out of the way for the time being we can turn our attention (as investors) to the problems of Federal government deficits and trade policy.