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Credit Insights

Federal Reserve’s Dovish Shift Surprises Bond Market

The Federal Reserve surprised the markets with its shift toward a dovish monetary posture. Based on its latest projections released last week in conjunction with the March statement of the Federal Open Markets Committee, the Fed acknowledged that economic growth has slowed since the fourth quarter, lowered its economic forecasts, and indicated that it will not hike the federal-funds rate any further this year. As recently as December 2018, the Fed had indicated that it expected to raise interest rates twice in 2019. In addition, the Fed announced that in September, it will discontinue the run-off of its balance sheet.

While the shift may have surprised many traders, the changes in the Fed’s monetary posture were quickly absorbed in the interest-rate futures market. According to the CME’s FedWatch Tool, the market-implied probability that the federal-funds rate would remain unchanged through the end of 2019 plunged to only 44% from 70% just one week ago and 89% one month ago. The probability of one rate cut jumped to 39% from 26% last week and 11% a month ago. The probability of two or more rate cuts increased to 17% from 7% last week and less than 1% a month ago.