Fed likely to hold rates; attention to be focused on potential growth downgrades, says DBS Economics

The Federal Reserve is expected to hold rates at its monetary policy meeting on March 21, in which the attention will be focused on potential growth downgrades and the possibility of a more dovish dot plot (currently two hikes in 2019 and one in 2020), according to the latest research report from DBS Economics and Strategy.

Global data have not shown any signs of a turnaround just yet and US data have been mixed. Nowcasts from the New York and Atlanta Fed also point to a slowdown in the US economy in the first quarter.

"While the government shutdown probably exacerbated growth weakness, we suspect that downside risks to 2019 growth may still be dominant," the report commented.

The market is already positioned for a dovish outcome with 10-year UST yields hovering just below 2.60 percent, close to the bottom of its recent trading range. Shorter-term rates are even more aggressive, factoring in rate cuts in 2020.

The reaction in UST yields echo 2015 and 2016. During that period, the market was dealing with China hard-landing risks while the European Central Bank (ECB) was embarking on quantitative easing.

The Fed managed a paltry one hike per year (in 2015/16) and that was insufficient to prevent US yields from diving along with other DMs. There are clear parallels today with the ECB announcing another round of easing.

Moreover, many of the major economies also appear to be leaning towards easing rather than tightening. Constraints on the Fed on this front and depressed DM yields are likely to keep US yields lower than they otherwise would have been, DBS added in its report.