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The Fed finally decided to hike and the Greenback plunged as a result. Wait, what?

That’s right!

And if you’re wondering why the Greenback plunged, or maybe you just wanna know some of the most important points from the Fed’s March statement and presser, then here are the key highlights that you need to know about.

USD Index: 15-Minute Forex Chart
USD Index: 15-Minute Forex Chart

1. Vote to hike was not unanimous

The Fed finally voted to hike rates for the first time this year, raising the target range for the Fed Funds Rate by 25 bps to a new target range of 0.75% to 1.00%.

However, the decision was not a unanimous one, as you can see below.

March FOMC: Voting Record

The voting record shows that Minneapolis Fed President Neel Kashkari was the sole dissenter. This is not really that surprising, though. If you can still remember my Roundup of Recent Fed Statements, I noted that Kashkari thinks that the labor market still has “more room to run” in one of his recent speeches. This is the same statement he had in a February 7 blog post, wherein Kashkari explained the reasons why he voted to keep rates steady during the February FOMC statement and why he will likely continue doing so.

2. Economic outlook mostly unchanged

As you can see below (click the pic to enlarge), the Fed’s economic projections during the March FOMC statement were mostly unchanged from the forecasts it presented during the December 2016 FOMC statement. There were some very slight shifts, which can be seen in the central tendencies and ranges, that caused the median projection to tick higher or lower here and there, but forecasts were unchanged for the most part.

Heck, even Yellen herself said that these “economic projections are virtually identical to those [the Fed] issued in December.”

March FOMC: Economic Projections

Regarding Yellen’s commentary on the Fed’s assessment of the economy, there was nothing really remarkable or new, except with regard to business investment. In both the December 2016 and February 2017 FOMC statements, Yellen noted that “business fixed investment has remained soft.” In the March FOMC statement, however, Yellen said that business investment “has firmed somewhat.” That didn’t really affect the Fed’s growth projections, though.

3. Path of tightening essentially unchanged

The Fed’s rate hike projections were essentially unchanged, as you can see below.

March FOMC: Fed Funds Rate Projections

The forecast for the Fed Funds Rate for 2017 is still at 1.4%. And using the higher bound of the new target range (0.75% to 1.00%) as the starting point, that means that the Fed is forecasting 1-2 more rate hikes at the standard increment of 25 basis points.

For 2018, the Fed still sees the Fed Funds Rate at 2.1%, which means 4-5 additional rate hikes, using the current target range as the starting point. The projection for 2019 is slightly more interesting since it was upgraded slightly from 2.9% to 3.0%. This means 8 additional rate hikes versus 7-8 hikes. Still essentially unchanged, though.

However, if we look at the so-called dot-plot, we can see that Fed officials have become slightly more hawkish.

March FOMC: Space Invaders Arcade Game

If you don’t understand what you’re looking at, let me break that down for you. There are two Fed officials who think the Fed Funds Rate should only be at 0.875% by the end of the year, unchanged from December. This means that they would agree to only one hike in 2017 at most. Kashkari is very likely one of those Fed officials. He did vote against a rate hike after all. I guess that also means that we can expect him to continue voting against future rate hikes now that the upper range of the Fed Funds Rate is at 1.00%.

Moving on, there is one Fed official who thinks the Fed Funds Rate should be at 1.125%, which means he or she supports 1-2 rate hikes within the year. Interestingly enough, there were four of them during the December 2016 FOMC statement.

The three other Fed officials apparently moved up to the camp that thinks 1.375% should be the Fed Funds Rate by the end of 2017, since there were now nine Fed officials who belong in this camp, up from six back in December. This means that they support 2-3 rate hikes this year, which is why I said that Fed officials have become slightly more hawkish. Unfortunately, the dot-plot reflects the opinion of all FOMC members, voting and non-voting members alike. And for all we know, those three hawkish Fed officials could be non-voting members, which would make the switch to a more hawkish stance meaningless, since they can’t vote on it.

Anyhow, the rest of the Fed officials support 3 or more rate hikes. So, that means that 14 out of 17 Fed officials are open to 3 rate hikes this year, with 5 of the 14 Fed officials open to more than  3 rate hikes.

4. The Fed’s rationale for a rate hike

According to Fed Chair Yellen’s prepared statement, a rate hike “is appropriate in light of the economy’s solid progress toward [the Fed’s] goals of maximum employment and price stability.”

Yellen then added that the rate hike “reflects [the Fed’s] view that waiting too long to scale back some accommodation could potentially require [the Fed] to raise rates rapidly sometime down the road, which, in turn, could risk disrupting financial markets and pushing the economy into recession.” This is the same thing she said during her March 3 speech.

And in the Q&A session, Yellen also said that the Fed decided to hike because the U.S. economy had been doing A-okay and is expected to continue doing so. Specifically, she said the following:

“Our decision to raise rates should certainly be understood as a reflection of the confidence we have in the progress the economy has made and our judgement that that progress will continue.”

Overall, pretty standard stuff. However, Bloomberg’s Kathleen Hays challenged Yellen to explain “what happened between December and March” that warrants a rate hike.

Hays noted that consumer spending was not “roaring” in Q1 2017, given the mixed retail sales report. She also cited the Atlanta Fed’s GDPNow, which forecasts Q1 2017’s GDP growth to come in at 0.9% quarter-on-quarter annualized, a two-year low. Hays then noted that the Fed itself has observed that measures of inflation compensation remain low, so wage growth (and inflation by extension) is not expected to pick up quickly soon. Furthermore, Hays pointed out the Fed’s own admission that the Fed doesn’t really know what Trump’s fiscal policies will be and how they would affect the economy. Finally, Hays asked the following:

“What is the motivation here? The economy is so far from your forecast in terms of GDP, [so] why does the Fed have to move now? What does this signal, then, about the rest of the year?”

And Yellen replied by first saying that “GDP is a noisy indicator.” She then pointed out that GDP growth has been about 2% per year on average. And this pace of growth “has been consistent with a pace of job creation that is more rapid than what is sustainable if labor force participation begins to move down, in line with what we see as its longer-run trend with an aging population.”

In short, Yellen ignored the concerns raised by Hays and then pivoted to one of the Fed’s dual mandates, maximum employment in this case. And on that note, let me just point out that the Fed is solely focused on its dual mandate, and “not economic growth per se,” as Yellen explained during her February testimonies.

This is why Yellen hinted at a rate hike during her March 3 speech, even though Yellen openly admitted in that speech that “the ongoing expansion [in the U.S. economy] has been the slowest since World War II, with real GDP growth averaging only about 2 percent per year.” And for reference, historical U.S. average growth is around 3.2% per year.

Final Thoughts

Kashkari’s dissent was a bit disappointing, but somewhat expected, so no biggie there. A little profit-taking was also to be expected, given that the rate hike was widely expected, thanks to the media blitzkrieg launched by the Fed ahead of the March FOMC meeting.

Even so, the Greenback’s reaction was too big for mere profit-taking. In fact, it looks like the Greenback got the rug pulled from under its feet, metaphorically speaking of course.

A big clue to the Greenback’s rather strong bearish reaction is that odds for a June rate hike dropped from 53.2% to 49.6%, according to the CME Group’s FedWatch Tool. This means that the market no longer thinks that a follow-up rate hike by June is quite likely.

June FOMC Rate Hike Odds
June FOMC Rate Hike Odds

Okay, cool. But why would the market lower its rate hike expectations? Well, market analysts blamed that on disappointment over the Fed’s unchanged economic outlook and, perhaps more importantly, the Fed’s unchanged projections for the Fed Funds Rate.

After all, the Fed did hype the market for the March rate hike. And given the Fed’s activity of signaling an early March rate hike, expectations were high that the Fed would upgrade its projections for the Fed Funds Rate, or at least its economic projections. However, the Fed didn’t do either of those things, which the market apparently found very disappointing.