The current dovish stance which has been taken by the FED, led to an inversion in the yield curve, as the 10 Year Treasury bond yield fell dramatically and the plotting of interest rates specifically between the 3-month yield and 10 years treasury yield showed a negative yield curve. This inverse yield curve is considered to be a significant recession indicator. Due to this fear of recession, the Dow Jones industrial average fell about 1.77 per cent on Friday, 22 March 2019.
The recent dovish stance taken by the US Fed from an earlier tightened economic stance was considered as a result of the fact that the US central bank was expecting a far bleaker outlook for the economy than other analysts. Notably, the Fed maintained the status quo and the rates remained unchanged.
However, the recent economic data has instigated a fresh zeal into the financial markets. The jobless claims have fallen much more than what was anticipated by the economists. The Fed Chairman Mr. Jerome Powell gave an indication that the interest rates could remain on hold for some time as the inflation remains within the range of comfort. The dovish stance was also on account of the fact that the US Central bank sees the global risk having an impact on to the US economic outlook. The Central bank’s officials have also decided to slow the drawdown of the bond holdings and end it in the month of September, which is also expected to give thrust to the economy. The Fed is of the view that it must remain patient on the policy front and let the situation calm down and clarify itself over the coming period. The officials reiterated that the economic data that they have gathered doesn’t suggest that the Fed should move on either direction.
As a consequence, to this, the 10 years sovereign US Treasury yield dropped to its lowest level of 2.435% as on the 25 of March 2019 (EDT 10:30 PM). Also, the US Dollars registered a fall as the investors found the US bonds less attractive and hence the demand for the US Dollars fell leading to this decline.
The Fed officials said that they do not see any further rates hikes in the FY 2019. Also, it is pretty reasonable now to say that the Central Bank is quite closer to achieving its twin objective of stable inflation as well as containing the jobless claims. However, it is wary of the gloomy global macroeconomic conditions as the trade disputes persists between the US and China, a slowdown witnessed in China, Europe and other emerging economies including BRICS nations as well as the consequences of BREXIT, which is expected to impact the economic activities and trade in West in a substantial manner. Therefore, the Fed will keep on having a close watch as these events evolve and unravel in the upcoming months.
In the US, the equity markets benchmarks witnessed a rally as on 21 March 2019. The stock of Apple rose by more than 4% in the trade. It helped the wall street to move higher as the markets got pacified by an upbeat economic data followed by the decision of the Fed to keep the rates unchanged and forecasting no rate hikes for 2019. However, due to the fear of global economic slowdown leading to unfavourable impact on the broader movement of equity markets. As a result, Dow Jones industrial average closed the session in red on 22 March 2019.
Many analysts have stated that the stance of Fed has suddenly become very dovish which gives an indication to them that the Central bank has jumped to a conclusion that the subdued performance of the market since the start of the year is expected to be more fundamental and persistent rather than a temporary phenomenon, thus requiring some kind of stimulus.
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