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Doves playing hawks
Dividing central bankers into doves and hawks can be too simplistic. Apparent Fed hawkishness this week concealed a dovish outlook – Chinese and Japanese policy announcements were similarly nuanced.
Christian Nolting 23 Mar 2017

Dividing central bankers into doves and hawks can be too simplistic. Apparent Fed hawkishness this week concealed a dovish outlook – Chinese and Japanese policy announcements were similarly nuanced.

The 0.25% Fed rate hike was no surprise, as the Fed members had been carefully appearing more hawkish in recent weeks.

But Janet Yellen was careful to remind investors that the Federal Open Market Committee (FOMC) has not changed their “views about economic risks,” that monetary policy remains “accommodative” and that the interest rate hike does not “reflect a reassessment of the economic outlook.”

This was apparent in the minimal changes to their outlook for economic growth. The Fed’s economic forecasts were only slightly changed and the accompanying dot plots (individual FOMC member forecasts) suggested only two more rate rises were likely in 2017.

Markets quickly realized that these were doves playing hawks and reacted accordingly, with Treasury yields and the US dollar falling while equities rose.

But we think that the Fed’s less aggressive tone may have been appropriate, given the tepid growth in consumer spending and looming political risks this year. Our base case remains that the Fed raises interest rates twice more this year, with the next hike coming in June.

Both the People’s Bank of China (PBoC) and the Bank of Japan (BoJ) made policy announcements the following day, with the former being unscheduled.

The PBoC decision to raise repo rates was clearly intended to signal a less accommodative stance, but note that it kept the main policy rates on hold, presumably concerned about the risks to domestic leverage if it tweaks them.

The BoJ remains an unashamed dove, still talking about expanding the monetary base and expecting moderate economic expansion, while saying it is keeping a close eye on Fed monetary policy.

Few were surprised by the subsequent Bank of England decision to keep rates on hold, but it did warn about inflation. UK labour market data had already demonstrated a hit to real wages.

The main European focus was on the Dutch elections, where Dutch voters backed pro-European parties and helped Prime Minister Rutte’s Liberals to beat the EU-sceptic Freedom Party (PVV) of Geert Wilders by a large margin.

Some have seen the PVV’s disappointing performance as a favourable portent for the upcoming elections in France, but voter dynamics could still play out rather differently.

Christian Nolting is Global CIO, Deutsche Bank

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