Sharp shift to Fed dovishness

Washington

THE Federal Open Market Committee's (FOMC) decision to pause rate increases was long telegraphed and widely expected. But the highly dovish messaging in the Federal Reserve statement and press conference by chair Jerome Powell surprised markets. The reasoning for the sharp shift in Fed rhetoric between December and January remains elusive. Fed speakers will have an opportunity in coming weeks to shed greater light on the extent of the pivot.

The Fed is a hallowed US institution. The staff is uniformly excellent and first-rate. The board is extraordinarily strong. Pause, patience, flexibility and data dependence had already appropriately become the Fed's watchwords. The late January "pause" was a done deal. But the board statement and press conference were perceived as going much further. The Fed's tightening bias was dropped by removing language about the risks being roughly balanced and the indication that the next rate move could be just as well up or down. The Fed suggested its balance sheet will remain large and could be more proactively adjusted in the future.