The overnight session was surprisingly quiet given yesterday’s post-FOMC celebration in risk markets. Treasury prices are slightly higher, and S&P 500 futures are essentially unchanged.  Yesterday’s FOMC statement and Powell press conference exceeded expectations with regards to just how dovish they would be. The official statement now states that the “Committee will be patient as it determines what future adjustments” to the fed funds rate will be appropriate “in light of global economic and financial developments and muted inflation pressures.”

While this move had been somewhat telegraphed from recent Fedspeak and FOMC minutes, there was more uncertainty related to the Fed’s future plans for ongoing balance sheet reduction. Fed Chair Powell didn’t disappoint risk markets on that front either, suggesting that normalization could end sooner than expected. In other words, the Fed is considering leaving more excess reserves in the banking system that previously intended, which would imply a reduction (or end) to the pace of portfolio runoff at some point in 2019 or early 2020. As such, the reaction in risk markets was to be expected. The S&P 500 surged more than 1% in the immediate aftermath, and Treasury yields fell 3-7 bps. Market participants will take even more interest in the minutes of this meeting to see if this truly is the capitulation that it appears to be on the surface in the face of the recent market volatility during Q4.

Jason Haley
Managing Director, Investment Management Group